Variable Elasticity Of Substitution Production Function Research Articles

A novel method for calculating the contribution rates of economic growth factors

<abstract><p>The common production functions include the Leontief production function, the Cobb-Douglas (C-D) production function, the constant elasticity of substitution (CES) production function, the variable elasticity of substitution (VES) production function and so on. With different elasticity of substitution of factor, the production functions have different ranges of applications. In the production functions, the C-D production function is used the most widely because of its simple form, while the CES production function and the VES production function have limitations in applications due to their complicated forms. However, the C-D production function has the elasticity of substitution of factors of 1, and the CES production function has the elasticity of substitution of factors which is not 1 but a constant, so the two production functions both have limitations in applications. The VES production function with the variable elasticity of substitution is more practical in some application cases. This paper studies the applications of the VES production function model and gives a method of calculating the contribution rates of economic growth factors scientifically. As for the parameter estimation of the model, this paper gives an improved Sine Cosine Algorithm (SCA) to enhance the convergence rate and precision. Finally, the paper makes an empirical analysis on the contribution rates of economic growth factors of Shanghai City, China, using the method proposed.</p></abstract>

Macroeconomic Growth in Vietnam Transitioned to Market: An Unrestricted VES Framework

The Vietnamese economy has increased at high speed over the transformation decades; however, most recent studies on the economic growth of this country used the Cobb-Douglas or CES (Constant Elasticity of Substitution) production functions, which are unable to explore the relationship between the elasticity of capital-labour substitution and development process, and hence, are not relevant to accessing a dynamic economic system. For that reason, this study is conducted to specify an unrestricted VES (Variable Elasticity of Substitution) production function in a one-sector growth model of Vietnam, highlighted by two characteristics: successful transition from plan to market and rapid progress. The VES is given preference over the CES and the Cobb-Douglas having the elasticity of substitution between capital and labour varying with economic development. By employing a Bayesian nonlinear regression through MCMC methods, the study reported the following findings: (1) the above-unity variable elasticity of capital-labour substitution in an aggregate unrestricted VES function specified for Vietnam shows that the model generates the possibility of endogenous economic growth; (2) the capital share tends to increase, while the labour share faces a downward trend along with the development of Vietnam; (3) the VES is empirically proven through a Bayes factor test to be superior to the CES and Cobb-Douglas for analysis of the growth process of Vietnam, an emerging transition economy.

Technical change, variable elasticity of substitution and economic growth

PurposeThe purpose of this paper is to explore the properties of the variable elasticity of substitution (VES) production function, and examine the dynamics of growth associated with it.Design/methodology/approachThe VES production function is incorporated into an otherwise standard Diamond overlapping generations model.FindingsDepending on parameter combinations, the economy can achieve a unique and stable steady state akin to that observed in the Solow-Swan model, reach a poverty trap or transition towards an upper bound of per capita capital stock. A special case of the VES production function is also consistent with unbounded growth.Research limitations/implicationsThe paper is theoretical in nature. Further empirical analysis could shed deeper insights into the results presented in this study.Practical implicationsThe VES production function, when applied to the context of the Diamond model, can capture a variety of growth experiences observed in the empirical literature.Social implicationsIn the context of the Diamond model, a higher value of a particular parameter in the production function leads to greater intergenerational income and consumption inequality. Hence, the study provides a potential explanation for intergenerational inequalities observed in practice.Originality/valueThe study demonstrates the empirical value of the VES production function in explaining observed differences in factor shares, rewards and elasticities within and between countries over time.

Parameter Estimation of a Mixed Production Function Model Based on Improved Firefly Algorithm and Model Application

Abstract In the analysis on economic growth factors, researchers usually use the production function model to calculate and measure influencing factors’ contribution rates to economic growth. Common production functions include the CD (Cobb-Douglas) production function, the CES (Constant Elasticity of Substitution) production function, the VES (Variable Elasticity of Substitution) production function, and so on. In consideration of the diversity and complementarity of models, the paper combines the CD production function with the CES production function and then proposes a mixed production function. With regard to the parameter estimation of model, the paper gives an improved firefly algorithm with the high precision and a fast rate of convergence. With regard to the calculation of factors’ contribution rates, traditional methods generally have big errors and are not applicable to complicated models, so the paper offers a new method which can calculate contribution rates scientifically. Finally, the paper calculates the contribution rates of factors affecting Chinese economic growth and gets a good result.

Substitutability between production factors and growth. An analysis using VES production functions

This work investigates the economic growth problem of establishing a relation between the elasticity of substitution between production factors, capital and output per-capita levels when dealing with a non constant elasticity of substitution production function. Starting from a discrete-time setup, some definitions of elasticity of substitution associated to an attractor are proposed and a general method to measure it is suggested. Thanks to this methodology a government may select a proper economic policy in order to reduce production costs without decreasing the capitalisation trend of the economy. The method proposed is applied to the Solow’s type growth model with differential savings using a Variable Elasticity of Substitution (VES) production function with constant returns to scale. It is found that when shareholders save more than workers or the elasticity of substitution is higher than one, a country characterised by production functions with higher elasticity of substitution experiences higher capital and output per-capita equilibrium levels. On the other hand, when the elasticity of substitution is lower than one and workers save more than shareholders, an ambiguous relation between elasticity of substitution and asymptotic dynamics is shown.

CES and VES Production Functions in a Cross-Section Context

Recent years have witnessed a growing interest in variable-elasticity-ofsubstitution (VES) production functions. Alternative parametric forms have been derived, analyzed, and tested on various bodies of data by Lovell (1968), Lu and Fletcher (1968), and Revankar (1971), among others. Several studies have found the elasticity of substitution between capital and labor to vary, usually inversely and often significantly, as capital deepening occurs. Such evidence naturally casts some measure of doubt on the empirical usefulness of any constant-elasticity-of-substitution (CES) specification as a descriptive tool.' The purpose of this study is to shed some theoretical and empirical light on the subject. It is well known that time-series evidence can be misleading if consideration is not accorded the manner in which technical change affects a production function. If technical change is biased in Hicks's sense, the net relationship between the elasticity of substitution and factor proportions along an isoquant is obscured by a nonradial displacement of the isoquant map as technical change occurs. Cross-section evidence is subject to analogous, but less widely recognized, reservations. Nonneutral geographical variation in production technology causes the same estimation problems as biased technical changes does in a time-series context. In either case discrimination between alternative functional forms becomes a difficult proposition. After elaborating on this point in Section II, we introduce two specifications of an aggregate production function that are amenable to estimation in a cross-section context. One function is CES, the other VES, and both encompass the Cobb-Douglas (CD) form as a special case. Both functions contain three factors of production (capital, production labor, and non-