INPROFORUM 2016

Short-Run Elasticity of Substitution
Karol Szomolányi, Martin Lukáčik, Adriana Lukáčiková

Language: en
Last modified: 2017-03-16

Abstract


We provide a strategy for estimating a short-run elasticity of factor substitution. The method is based on a co-integration estimation relationship between factor prices and average factor products. From the literature, it is known that this form is useless for estimating a long-run elasticity of substitution coefficient, because it is not consistent with a theory. However, restricting the long-run relationship according to the theory and estimating the short-run coefficients with the co-integration coefficient jointly in one step allows estimating the short-run elasticity of substitution. The co-integration term of the form captures possible underlying long-run processes and so it is useful in obtaining the unbiased estimate. To verify the method we use Jorgenson’s sector data of the United States of America. In the results U.S. short-run elasticity of substitution is relatively small and it differs in different sectors. These values are between 0.05 and 0.64. In the conclusions we argue that the small and in different sectors different values of the coefficient is supported by the both empirical and theoretical research.

Keywords


Elasticity of factor substitution; Long-run and short-run; Co-integration analysis; Neoclassical growth theory

Full Text: PDF