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Is the U.S. Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of Substitution
1Harvard University, (email)
Citation Information: Contributions in Macroeconomics. Volume 4, Issue 1, ISSN (Online) 1534-6005, DOI: 10.2202/1534-6005.1161, April 2004
- Published Online:
I present new estimates of the elasticity of substitution between capital and labor using data from the private sector of the U.S. economy for the period 1948-1998. I first adopt Berndt's (1976) specification, which assumes that technological change is Hicks neutral. Consistently with his results, I estimate elasticities of substitution that are not significantly different from one. I next show, however, that restricting the analysis to Hicks-neutral technological change necessarily biases the estimates of the elasticity towards one. When I modify the econometric specification to allow for biased technical change, I obtain significantly lower estimates of the elasticity of substitution. I conclude that the U.S. economy is not well described by a Cobb-Douglas aggregate production function. I present estimates based on both classical regression analysis and time series analysis. In the process, I deal with issues related to the nonsphericality of the disturbances, the endogeneity of the regressors, and the nonstationarity of the series involved in the estimation.