Elasticity Of Substitution Research Articles

Substituting Clean for Dirty Energy: A Bottom-Up Analysis

We fit CES and VES production functions to data from a numerical bottom-up optimization model of electricity supply with clean and dirty inputs. This approach allows for studying high shares of clean energy not observable today and for isolating mechanisms that impact the elasticity of substitution between clean and dirty energy. Central results show that (i) dirty inputs are not essential for production. As long as some energy storage is available, the elasticity of substitution between clean and dirty inputs is above unity; (ii) no single clean technology is indispensable, but a balanced mix facilitates substitution; (iii) substitution is harder for higher shares of clean energy. Finally, we demonstrate how changing availability of generation and storage technologies can be implemented in macroeconomic models.

ESTIMATION OF EFFECT ON GROSS DOMESTIC PRODUCT OF PRODUCTION FACTORS USING CES AND TRANSLOG PRODUCTION FUNCTIONS: AN APPLICATION TO CHINA ECONOMY

In this study, the effects on the economic growth (GDP) of capital, labor and energy input factors for the Chinese economy are investigated with the help of the CES and Translog production functions. According to the empirical findings of the study, it can be said that the GDP data obtained using the CES production function are less efficient than the estimates obtained using the Translog production function. The Ridge regression technique was used for parameter estimation of Translog production model since there is multicollinearity between the variables in the model. The output elasticities and the substitution elasticities between each input factor are then dynamically estimated, based on the appropriate Translog production model that includes the capital, labor and energy input factors. In addition, the inputs of the Translog production model were estimated using the Holt-Winter's method to predict the future economic growth of the Chinese economy. Consequently, output elasticities of all input factors are positive, and we can rank the input factors as labor, capital and energy according to their degree of impact on GDP, respectively. This shows that the Chinese economy is labor and capital intensive.

Assessing the costs of GHG emissions of multi-product agricultural systems in Vietnam

Besides a vital sector of the economy, agriculture is a primary source of greenhouse gas (GHG) emissions. The present paper investigates the impact of carbon tax policy on Vietnamese agriculture by focusing on multi-product systems such as rice, livestock, and aquaculture, traditionally called the Vuon (Garden)–Ao (Pond)–Chuong (livestock pen) system (VAC). In it, farmers use garden, pond, and pen by-products as fertilizer and feed. We use shadow prices and Morishima substitution elasticities as greenhouse gas emissions indicators, estimated with directional output distance function. Farmers in the Mekong Delta region are found to be technologically less efficient than in other regions of Vietnam, though the shadow prices of GHG emissions are lower there too. This indicates that farmers in the Mekong Delta, generally concentrating either on livestock or aquaculture, have greater potential for reducing GHG emissions by way of improvements in technical efficiency than do those in other regions. However, Morishima elasticity estimates show that policy impacts diminish more quickly in the Mekong than elswhere. We suggest the Vietnamese government encourage Mekong Delta farmers to employ technologically more efficient methods or shift to more balanced farming to reduce the shadow price of GHG emissions, encouraging more efficient emissions reduction.

Output and Substitution Elasticities in Pakistan’s Industrial Sectors: Panel Data Analysis

This study performed a panel data analysis of Pakistan’s nine major sub-industries in the years 1980–2019. The primary objective was to conduct a disaggregate analysis of the substitution elasticity of inputs in the different industries, including textile, mining and currying, manufacturing, fuel extraction, electricity, gas, and water supply, using the translog production function. The study used the translog production function to estimate output and substitution elasticities for each sub-industry. Based on the results of the output elasticities, the study concluded that there were negative elasticities for the inputs oil, gas, and labor, except for capital, which had positive elasticity, causing increasing returns to scale for industries. The elasticity of substitution was greater than one and the value was positive, showing that costly energy inputs can and should be replaced with cheaper energy inputs in these industries. For instance, electricity can be replaced with gas, which is cheaper than electricity in Pakistan.

Do imports of intermediate inputs generate higher productivity? Evidence from Ecuadorian manufacturing firms

AbstractThis paper examines the causal effect of importing on firm productivity. We use an augmented Cobb–Douglas production function in which the static and dynamic effects of importing and exporting are estimated for formal manufacturing firms in Ecuador. We use a rich administrative data set that covers the period 2007–2018 and estimate total factor productivity (TFP) at the firm level. Our results show that both static and dynamic effects are important sources of gains from importing. We find that static and dynamic gains in productivity from importing intermediates are higher in more innovative industries than in less innovative industries, which implies an industrial heterogeneity effect. We also find that the elasticity of substitution between imported and domestic intermediates in all the industries are substitute inputs. Finally, we provide robust evidence in favour of self‐selection on the entry and exit side sides of the market. Our estimation results provide support to the learning‐by‐importing hypothesis.

Economic sanctions as deterrents and constraints

This article analyses economic sanctions starting from the perspective of a target that has to allocate its income between spending on resources to pursue a contentious policy and consumption goods. By studying the target’s consumption problem, it demonstrates how sanctions could backfire causing the target to shift its spending to resources to pursue the contentious policy, thereby increasing the severity of the policy. Whether this will come to pass depends on the elasticities of substitution, which are determined by the target’s utility function. Therefore, even sanctions that seem like they could do no harm, such as embargoes on luxury goods consumed by only the target’s dictator, could aggravate the level of the policy given the right utility function. Considering the target’s consumption problem also illustrates how sanctions could (depending on the form of the target’s utility function) reduce the resources it could allocate to pursuing the contentious policy, thereby moderating it. If the benefits of this constraint outweigh the costs of sanctions to the sender, it could be in the sender’s best interest to impose sanctions. In these cases articulating a demand and waiting for the target to consider it would simply provide the target with additional time to continue the contentious policy, so the sender would impose constraining sanctions without warning. Constraining sanctions, therefore, provide an explanation for sanctions imposed without a threat stage. Constraining sanctions can occur even with complete and perfect information and may persist indefinitely, explaining the existence of long-term costly sanctions as well as sanctions that occur in cases of full information.

Responses of exporters to trade protectionism: Inferences from the US-China trade war

This paper investigates how exports respond to trade protection by studying the US-China trade war in 2018. Using monthly customs data in China from January 2017 to May 2019, we find that the launch of the trade war against Chinese exports by the US on average reduces Chinese total exports to the US by 16.47%. Further decomposition shows that the reduction in exports is mostly explained by a decrease in quantity, with prices relatively unchanged. Meanwhile, negative trade shocks cause export diversion to countries that are closer and have larger economies, and exports in R&D-intensive, skilled-labor-intensive, high-capital-income-share, and upstream industries have been diverted even more. Heterogeneous analyses show that industries with a comparative advantage, high export growth, large export value, and high elasticity of substitution are more responsive to trade protection.

The Optimal Urban Scale from Different Perspectives and under Different Development Goals Based on the CES Utility Function

To analyze the differences in the optimal urban scale of a country, a government, and residents under different urban development goals and to provide a reference for urban development, an urban development model is constructed based on the constant elasticity of substitution (CES) utility function. The objective function includes four indicators: the economic level, the traffic level, environmental quality, and living conditions. The urban development model is constructed by integrating an urban road planning model, bus route planning model, land use model, and four-stage traffic sharing and traffic allocation model. Based on the setting of different development goals, this model is used to calculate the urban utility value perceived by each stakeholder at different urban scales. Through comparative analysis, we determine the following: (1) When the urban development goals are different, the optimal urban scale of residents and the government differs greatly, and the optimal scale of the country differs very little. (2) When facing the same development goal, the optimal urban scales of the three stakeholders are not the same. However, the three stakeholders are closely related to urban development. Therefore, the selection of the optimal urban scale should comprehensively consider the interests of the three stakeholders.

Will the substitution of capital for labor increase the use of chemical fertilizer in agriculture? Analysis based on provincial panel data in China.

Major changes have taken place in the agricultural factor input structure in China, which will inevitably affect fertilizer input in agriculture. However, there is no consistent conclusion about the impact of capital and labor input on chemical fertilizer input. This paper employed directed acyclic graphs (DAGs) to clarify the influence of capital-labor input structure on the use of chemical fertilizer. Using inter-provincial panel data, the dynamic panel system GMM method was adopted to examine the mechanism of factor substitution elasticity in determining the impact of agricultural capital-labor input on chemical fertilizer input. The results showed that agricultural labor and capital input are positively correlated with chemical fertilizer input. In the process of capital and labor input affecting fertilizer input, the elasticity of factor substitution plays a negative moderating role. From 1996 to 2018, the trend of capital replacing labor was evident, and the increase ratio of capital input was greater than the decrease ratio of labor input. Therefore, an increase in capital input and its substitution for labor is the main driver of the increase in fertilizer input. At the same time, the elasticity of fertilizer-capital substitution declined during the period 1996-2018, thereby reinforcing the increase in fertilizer input caused by the increase in capital input. In order to reduce agricultural pollution caused by the increase in chemical fertilizer input, it is crucial to reverse the declining trend in the elasticity of fertilizer capital substitution.

On a Geometric Programming Approach to Profit Maximization: The Case of CES Technology

The profit maximization problem takes a central place in the theory of the firm, especially when conditions for perfect competition hold. In this paper, we solve the profit maximization problem of a perfectly competitive firm when the constant elasticity of substitution (CES) production function with n≥2 inputs describes its technology. Commonly, this problem is solved by using multivariable differential calculus. However, to avoid tedious algebraic manipulations and bypass checking nontrivial necessary and sufficient conditions, we employ geometric programming (GP), and the power mean inequality (PMI) as an elegant complementary tool to multivariable calculus. Since the GP and the PMI are simple optimization techniques without derivatives, they can provide new insights into the given problem to managers, students, and other audiences who may be unfamiliar with multivariable differential calculus. Additionally, by using the properties of limits, we show that the solution to the profit maximization problem with Cobb-Douglas technology is a limiting case of our result.

Intellectualization and substitution elasticity of capital on the labour force in logistics enterprises: evidence from China and the United States

ABSTRACT This paper addresses the substitution elasticity of capital on the labour force in the context of the development of intellectualization. Given the substitution of capital for labour, China’s benchmark listed logistics companies are compared with an American company to discuss the evolution of capital – labour substitution. A large-scale intellectualization process began in 2017, and based on a variable elasticity of substitution, this paper creates an econometric model of substitution elasticity between capital and labour and its evolution between 2017 and 2021. The American logistics company UPS maintains a relatively high level of substitution elasticity, and Chinese logistics companies are quickly catching up. The substitution elasticity of capital on labour in Chinese enterprises trends upward year after year. In 2021, the capital – labour substitution elasticity of logistics enterprises in both countries showed considerable growth. The calculation model of substitution elasticity presented in this paper can be extended to different regions and industries to measure intelligent development levels and the relationship between capital and the labour force.

Identification Robust Empirical Evidence on the Open Economy IS‐Curve

AbstractExisting empirical evidence on the Euler equation based on closed economy models suggests low responsiveness of aggregate consumption to changes in interest rates. We incorporate open economy features and consider extensions that include habit formation and hand‐to‐mouth consumers. For several open economies and applying econometric methods that are robust to weak instruments and structural changes, we continue to find low values for the elasticity of intertemporal substitution, implying a small effect of real interest rate changes on aggregate income. In some countries, structural changes are informative for identification, but otherwise aggregate data provide limited information to learn about IS‐curve specifications.

Consumption with earnings, liquidity, and market based models

The market, earnings, and liquidity growth combine to form a proxy for wealth growth, allowing a recursive consumption model with a low risk aversion coefficient, a risk-free rate close to historical, a high equity premium, and a reasonable elasticity of intertemporal substitution. The empirical consumption model does well against major asset pricing puzzles. Tested over 118 years it is not rejected while a forward-looking consumption model using the market alone as a wealth proxy fails. Changing liquidity and earnings forecast consumption and their ‘crashes’ precede consumption declines. We also demonstrate related stock level factors have similar economic magnitude and are significant. These models are consistent to the financial intermediary economic growth literature. Such consistency across approaches adds credence to common earnings and liquidity factors as important risks to investors.

Examining techno-economic interactions among fish species: A case of small-scale demersal fishery

Using the multi-product dual revenue function framework, this paper examines the nature and extent of technical and economic interactions among five demersal species of Al-Batinah demersal fishery, Oman during the 2010–2016 period. The parameters of the system of output supply functions are estimated using Zellner's seemingly unrelated regressions (SUR) technique. The likelihood ratio test in relation to the structure of the multi-output production technology rejects the null-hypothesis of input-output separability and non-jointness in inputs. These results suggest that the underlying production technology is non-separable between the outputs and the quasi-fixed input, and the harvesting level of one species is likely to have spill-over economic effects on the harvesting levels of others. The own-price elasticities of output supply are found to be positive, inelastic, and statistically significant in four out of five cases suggesting that, other things being equal, fishers' supply decisions are influenced by the prevailing market prices of outputs. The estimated values of the cross-price elasticity of supply are negative, inelastic and statistically significant at the 5% level for eight output pairs. The calculated values of the Morishima elasticity of substitution (MES) indicate the presence of substitutability between ten output pairs. The cross-price elasticity estimates are in the range of −0.001 (between Emperor and Catfish) to −0.275 (between Seabream and Grouper) which is lower (in absolute value) than that of the MES estimates. The magnitudes of the cross-price elasticity and the MES estimates indicate the extent of spill-over effects of one species on the other and signal the extent of species targeting by fishers. A statistically significant spatial, seasonal, and inter-annual variability is observed in all species cases. Finally, the implications of the findings are discussed from the perspective of developing effective management approaches, achieving sustainability of fisheries resources and improving fishers' socio-economic conditions stipulated in the Five-Year development plans for the sector.

Financial destabilization

This paper uses a dynamic general equilibrium model to examine whether financial innovations destabilize an economy in which a representative firm operates one production sector with a neoclassical production function. Entrepreneurs receive individual-specific productivity shocks in each period. Entrepreneurs who draw higher productivity shocks become capital producers and borrow production resources in the financial market, whereas entrepreneurs who draw lower productivity shocks become lenders. Capital producers face financial frictions and can borrow only up to a certain proportion of their funds. Under an empirically plausible elasticity of substitution between capital and labor, as financial frictions are mitigated, the economy loses stability, and a flip bifurcation occurs at a certain level of financial frictions. In some cases, a cycle with more than two periods and complex dynamics arise as period-doubling bifurcations repeatedly occur. In any case, the amplitude of fluctuations increases as financial frictions faced by capital producers are mitigated and is maximized when they are eliminated. These outcomes imply that financial innovations are likely to destabilize an economy.

Link investment substitutability: A factor influencing network formation

Studies on network formation employ rather different assumptions on link formation and make different predictions. We propose a constant elasticity of substitution (CES) link formation specification that generalizes commonly used link formation assumptions and parametrizes a factor that could affect network formation, namely, link investment substitutability (LIS). We apply this approach to the model by Galeotti and Goyal (2010) that studies public good provision on an endogenously formed network and find that results on equilibria differ significantly depending on whether link investments are substitutes or complements. Additionally, when link investments are complements, we find that LIS governs the unequalness of equilibrium structures. We also explore how LIS influences the relationship between the public good provision of a player and her utility.

Extraordinary economy policies amid Covid-19 pandemic crisis: economic growth, labour productivity and elasticity of substitution

Purpose- This study investigates current financial, fiscal and monetary policies implemented to enhance growth rate in developed economies. First main theoretical findings of neoclassical growth theory are reconsidered. Second, current economy policies from the perspectives of Central banks and Treasury departments are analyzed. Finally, the relationship between these two is investigated and whether the policies are adequate to theoretical findings is examined. Methodology- From the perspective of descriptive statistics, first; time evlotion of labor's share of output from 1947Q1 through 2016Q3 is analyzed. Second, time evolution of percentage change in labor productivity with respect to real hourly compensation are considered from 1948Q1 through 2022Q1. In addition, to identify the accelerating gap between labor productivity and compensation over recent decades, annual index levels from 1973 to 2022 for labor productivity with respect to real hourly compensation are taken into account. Third, the phase-space representation of rate of real growth for output per capita is developed. In methodological perspective, both time-space and phase-space analyses on output per capita, labor productivity and labor compensation clear the way to establish a theoretical model, which explains the interaction between these variables based on constant elasticity of substitution production function. Findings- For case of elasticity of substitution lower-than-unity, the relationship between rate of real growth for marginal productivity and average productivity of labor is obtained and is used to enlighten current U.S. monetary and fiscal policy implementations. Conclusion- The results demonstrate that amid Covid-19 pandemics, U.S. fiscal policy and monetary policy do not optimally match and hence the fiscal policy should be calibrated. U.S. fiscal policy increased minimum wages and U.S. monetary policy addressed tighter and perfectly competitive labor market. These two policies do not coincide in terms of efficiency. In other words, simultaneous application of these two policies will not give desired compound result. Keywords: Economic growth, labor productivity, fiscal policy, labor compensation, monetary policy JEL Codes: E62, O40, O41

Elasticities of substitution between marketing and farm inputs in a complete system of food commodities

AbstractThe elasticities of substitution between marketing and farm inputs are important for modeling the shape of derived demand and understanding the market structure in the food market. Wohlgenant develops a theoretical framework and finds significant substitution between marketing and farm inputs. The estimates in Wohlgenant have been widely used in economic studies on the US food market, and in this paper, we replicate the results, perform robustness checks, and update the estimates using recent data. Despite minor discrepancies, we are able to replicate most of the results in Wohlgenant and maintain robust estimates when we apply ridge regression. Using updated data, we calculate new estimates of the elasticities and find that marketing firms have become less competitive. We discuss important market trends in recent years and highlight potential venues for future research.

Environmental Tax and Wage Inequality when Pollution Impacts Health or Agricultural Productivity in Developing Economy

Many developing countries face severe environmental pollution and the preservation policy, such as the environmental tax, is widely adopted by many governments. This paper investigates the impacts of an increase in environment tax on wage inequality between skilled and unskilled labor when pollution affects labor health or agricultural productivity. We first build a basic model and assume pollution affects labor health and drives parts of labor out of the factor market. And we obtain that the elasticity of substitution between labor and dirty input in the unskilled sector determines the result of an increase in environmental tax on wage inequality. And when skilled and unskilled labor raise its cost of self mitigation, wage inequality will be narrowed down.The robustness of the basic model on the impact of a stricter environmental protection and the self-mitigation cost of unskilled labor is substantiated by the extended model that incorporates the bad externality of pollution on agricultural production; however, the impact of increased cost of mitigation of skilled labor on wage gap in the extended model is different, depending on the elasticity of pollution.

The fall of the labor income share: The role of technological change and hiring frictions

Documenting an average drop of the labor share of eight percentage points for eight European countries and the US between 1980 and 2007, we analyze the role of technological progress and labor market frictions. According to our results, while capital-labor substitution in general was not crucial, Information Communication Technology (ICT) explains more than half of the decline in the labor share, given an estimated elasticity of substitution with the labor input of 1.18. Considering hiring costs slightly dampens the estimated substitution effect at aggregate level. Additionally, by modeling the substitution between ICT and labor with a set of key labor market variables, we find it to be linked to both the share of routine occupations (positively) and the share of high-skill workers (negatively) with a similar strength.