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Article
Publication date: 8 October 2018

Sharmila Gamlath and Radhika Lahiri

The 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.

Abstract

Purpose

The 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/approach

The VES production function is incorporated into an otherwise standard Diamond overlapping generations model.

Findings

Depending 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/implications

The paper is theoretical in nature. Further empirical analysis could shed deeper insights into the results presented in this study.

Practical implications

The 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 implications

In 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/value

The 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.

Details

Journal of Economic Studies, vol. 45 no. 5
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 8 November 2013

Kusum Mundra

This paper revisits the derivation and properties of the Allen-Uzawa and Morishima elasticities. Using a Swiss dataset, this paper empirically estimates various…

Abstract

Purpose

This paper revisits the derivation and properties of the Allen-Uzawa and Morishima elasticities. Using a Swiss dataset, this paper empirically estimates various elasticities both in a dual and primal framework using a production theory open economy model and tests for linear homogenous technology. In addition to reporting elasticity at the mean, the standard practice in the literature, this paper also calculates nonparametric distribution of various elasticities. The paper aims to discuss these issues.

Design/methodology/approach

To assess the effect of price change on input, the paper estimates a translog cost function and to assess the effect of quantity change on price, the paper estimates the translog distance function using the data on Swiss economy. The paper estimates Allen-Uzawa and Morishima elasticity both under homogenous and non-homogenous technology using the Swiss dataset of one aggregate gross output and four inputs (resident labor, non-resident labor, imports, and capital) over 1950-1986. Elasticities are reported and compared at the mean as well as explored by looking at the range and nonparametric distribution.

Findings

This paper shows that constant returns to scale are easily rejected in this dataset and that the elasticities, both qualitatively and quantitatively, are very different under homogenous and non-homogenous technology. These elasticities can switch from complements to substitutes or vice versa when one moves away from the mean of the sample. The equality of the nonparametric elasticity distributions under homogenous vs non-homogenous technology is rejected in all cases except one.

Originality/value

This paper gives a clear derivation and interpretation of different elasticities as well as demonstrates using a dataset how to systematically go about empirically estimating these elasticities in a dual and primal framework. It shows that linear homogenous technology can be easily rejected and the elasticities, both quantitatively and qualitatively, are very different under homogenous and non-homogenous technology. This paper is also very valuable because it shows that the standard practice of reporting elasticity at the mean might not be adequate and there is a possibility that these elasticities can switch from complements to substitutes or vice versa when one moves away from the mean of the sample.

Details

Indian Growth and Development Review, vol. 6 no. 2
Type: Research Article
ISSN: 1753-8254

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Abstract

Details

Functional Structure Inference
Type: Book
ISBN: 978-0-44453-061-5

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Article
Publication date: 13 April 2012

Debdulal Mallick

Although the importance of the elasticity of substitution between capital and labour (σ) has been recognized in many areas in economics, this parameter has not received…

Abstract

Purpose

Although the importance of the elasticity of substitution between capital and labour (σ) has been recognized in many areas in economics, this parameter has not received enough attention in economic growth. The purpose of this paper is to review the recent development in the importance of σ in economic growth.

Design/methodology/approach

This paper specifically reviews the possibility of perpetual growth and slowdown, and the asymptotic behaviour of the balanced growth path for different values of σ. It also reviews the determinants of the aggregate σ.

Findings

Based on the empirical evidence that the value of σ significantly departs from the Cobb‐Douglas value of unity, the paper recommends employing the constant elasticity of substitution (CES) production function in both theoretical and empirical growth research.

Originality/value

This paper offers a new perspective on the elasticity of substitution between capital and labour due to its evaluation of various factors, methods and approaches.

Details

Indian Growth and Development Review, vol. 5 no. 1
Type: Research Article
ISSN: 1753-8254

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Article
Publication date: 1 February 1997

Catherine Kavanagh

Academic research in the USA and more recently in the UK and Sweden, has highlighted public capital as a significant growth determinant. Public capital, it is argued, has…

Abstract

Academic research in the USA and more recently in the UK and Sweden, has highlighted public capital as a significant growth determinant. Public capital, it is argued, has a positive effect on private sector output, productivity and capital formation. However, controversy surrounds the empirical results emerging from this literature. Much of the controversy rests on research methods employed. Adds to this body of literature in two ways. First, estimates aggregate production functions for private sector output using Irish data. The stock of public capital is included as an input to investigate the effects of government investment on private sector productivity. Second, uses modern time‐series techniques to test the hypothesis. Employs the Johansen (1988) cointegration testing procedure and error correction modelling on annual data for the period 1958‐1990. These modern techniques produce empirical results which do not support the public capital hypothesis. Suggests several reasons to explain this outcome, and outlines possible policy implications.

Details

Journal of Economic Studies, vol. 24 no. 1/2
Type: Research Article
ISSN: 0144-3585

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Book part
Publication date: 7 June 2013

Lan Liu and Chengyan Yue

A similarity index of maximum residue level (MRL) regulations is introduced into a variable elasticity of substitution (VES) model to analyze the impacts of MRL regulation…

Abstract

A similarity index of maximum residue level (MRL) regulations is introduced into a variable elasticity of substitution (VES) model to analyze the impacts of MRL regulation similarity on trade flows and social welfare. We specially consider the situation where the requirements set by the importing country are stricter than those of the exporting country. We find that the more similar the MRL regulation between trading partners is, the more substitutable their goods are, and for the consumers that have home preferences for domestic goods, they prefer the imported goods that are more similar to the domestic goods. Our results also show that if the developing countries upward harmonized their MRL standards to developed countries, their exports would expand.

Details

Nontariff Measures with Market Imperfections: Trade and Welfare Implications
Type: Book
ISBN: 978-1-78190-754-2

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Article
Publication date: 12 March 2021

Sedat Alatas

The purpose of this study is to examine whether the elasticity of substitution (ES) varies between developed and developing countries.

Abstract

Purpose

The purpose of this study is to examine whether the elasticity of substitution (ES) varies between developed and developing countries.

Design/methodology/approach

The author derives the growth regressions from the Solow model under the constant elasticity of substitution production function by using the first-order Taylor series expansion and estimate them for each country group classified based on time-varying behavior of income per worker using the data-driven algorithm.

Findings

The ES is not unitary and varies among country groups. Developed countries generally have a higher ES than developing countries.

Originality/value

For the first time, the author uses the first-order Taylor series expansion to linearize the steady-state value of income per worker, as the author considers this approach to be relatively more straight-forward and tractable. Furthermore, the author estimates the equations using both cross-section and panel data techniques and employs the data-driven algorithm proposed by Phillips and Sul (2007) to classify countries.

Details

Journal of Economic Studies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 31 October 2008

Carsten Colombier

The purpose of this paper is to shed new light on the debate about the appropriateness of the Kaizuka rule, a Samuelson type of efficiency rule for public inputs, for the…

Abstract

Purpose

The purpose of this paper is to shed new light on the debate about the appropriateness of the Kaizuka rule, a Samuelson type of efficiency rule for public inputs, for the provision of firm‐augmenting public inputs. Firm‐augmenting public inputs are commonly included in public infrastructure modelling.

Design/methodology/approach

In the microeconomic social surplus framework, and assuming perfect competition, the paper analyses how firm‐augmenting public inputs should be provided in order to maximise the welfare of consumers and producers. For this purpose, the paper develops a social surplus efficiency rule, i.e. the Boadway rule. Afterwards the question what the characteristics of firm‐augmenting public inputs mean for its efficient provision is examined.

Findings

The findings show that under perfect competition an omniscient government is unable to efficiently provide firm‐augmenting public inputs due to the characteristics of firm‐augmenting public inputs but not due to inappropriate efficiency rules.

Research limitations/implications

The findings show that future research would be ill advised to model public infrastructure as a firm‐augmenting public input.

Practical implications

Policy conclusions drawn from models that include firm‐augmenting public inputs, such as fiscal competition and endogenous growth models, should be reconsidered.

Originality/value

The paper makes a strong case that firm‐augmenting public input is not a viable concept for modelling public infrastructure. Rather, firm‐augmenting public inputs are similar to free goods.

Details

Journal of Economic Studies, vol. 35 no. 6
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 1 April 1991

Raghbendra Jha, M.N. Murty, Satya Paul and Balbir S. Sahni

Analyses the structure of costs in the cement, lime and plasterindustry of India. Using aggregative data for the period 1960‐61 to1982‐83 a generalised translog cost…

Abstract

Analyses the structure of costs in the cement, lime and plaster industry of India. Using aggregative data for the period 1960‐61 to 1982‐83 a generalised translog cost function is estimated. It is discovered that (1) this industry has been characterised, by and large, by allocative efficiency; (2) production is characterised by increasing returns to scale; (3) technical progress has been biased against the use of capital; and (4) there exist considerable opportunities for substitution between factors of production. Several policy conclusions of the analysis are also examined.

Details

Journal of Economic Studies, vol. 18 no. 4
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 5 August 2019

Sharmila Gamlath and Radhika Lahiri

The purpose of this paper is to explore the manner in which the degree of substitutability between public and private health expenditures contributes towards the…

Abstract

Purpose

The purpose of this paper is to explore the manner in which the degree of substitutability between public and private health expenditures contributes towards the distribution of wealth and political economy outcomes in the long run.

Design/methodology/approach

An overlapping generations model with heterogeneous agents where a person’s probability of survival into old age is determined by a variable elasticity of substitution (VES) health production function with public and private expenditures as inputs is developed. Public expenditure on health is determined through a political economy process.

Findings

Analytical and numerical results reveal that higher substitutability between private and public expenditures at the aggregate level and a higher share of public spending in the production of health lead to higher long run wealth levels and lower inequality. In the political equilibrium, higher aggregate substitutability between public and private health expenditures is associated with more tax revenue allocated towards public health. For most parameter combinations, the political economy and welfare maximising proportions of tax revenue allocated towards public health care converge in the long run.

Research limitations/implications

The paper is a theoretical investigation of how substitutability between public and private health expenditures affect transitional and long run macroeconomic outcomes. These results are amenable to further empirical investigation.

Practical implications

The findings indicate that policies to improve institutional aspects that yield higher substitutability between public and private health expenditures and returns to public health spending could lead to better long run economic outcomes.

Social implications

The results provide a political economy explanation for the low investments in public health care in developing countries, where aggregate substitutability between public and private health expenditures is likely to be lower. Furthermore, comparing the political economy and welfare maximising paradigms broadens the scope of the framework developed herein to provide potential explanations for cross-country differences in health outcomes.

Originality/value

This paper adopts an innovative approach to exploring this issue of substitutability in health expenditures by introducing a VES health production function. In an environment where agents have heterogeneous wealth endowments, this specification enables a distinction to be made between substitutability of these expenditures at the aggregate and individual levels, which introduces a rich set of dynamics that feeds into long run outcomes and political economy results.

Details

Journal of Economic Studies, vol. 46 no. 4
Type: Research Article
ISSN: 0144-3585

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