Is the Production Function Translog or CES? An Empirical Illustration Using UK Data

Elena Lagomarsino, Karen Turner

Research output: Working paperDiscussion paper

Abstract

Computable general equilibrium (CGE) studies are increasingly interested in informing keys parameters of their models using empirical data. Energy and environmental CGE findings have been found to be particularly sensible to changes in the values of the elasticities of substitution between inputs of production. Although applied econometric literature provides numerous estimates of substitution elasticities obtained from flexible functional forms cost or production functions, the number of papers dealing with Constant Elasticities of Substitution (CES) production functions, generally favoured in a CGE framework, is still limited. The contribution of this paper is to estimate the substitution relationship between energy and other inputs for the United Kingdom using a new approach that allows to understand whether a nested CES production function is adequate to describe the true input-output relationship. Moreover, the approach can be used to obtain an indication on which nested structure should is the most appropriate for the data considered. Findings suggest that the analysed dataset might support a four-input nested CES production function where the energy-capital are combined in an inner nest.
LanguageEnglish
Place of PublicationGlasgow
PublisherUniversity of Strathclyde
Pages1-30
Number of pages32
Volume17
Publication statusPublished - 4 Dec 2017

Fingerprint

Production function
Elasticity of substitution
Translog
Computable general equilibrium
Energy
Applied econometrics
Substitution
Empirical data
Flexible functional forms
Cost function

Keywords

  • elasticities of substitution
  • translog production function
  • nested CES
  • input separability
  • general equilibrium

Cite this

Lagomarsino, E., & Turner, K. (2017). Is the Production Function Translog or CES? An Empirical Illustration Using UK Data. (13 ed.) (pp. 1-30). Glasgow: University of Strathclyde.
Lagomarsino, Elena ; Turner, Karen. / Is the Production Function Translog or CES? An Empirical Illustration Using UK Data. 13. ed. Glasgow : University of Strathclyde, 2017. pp. 1-30
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abstract = "Computable general equilibrium (CGE) studies are increasingly interested in informing keys parameters of their models using empirical data. Energy and environmental CGE findings have been found to be particularly sensible to changes in the values of the elasticities of substitution between inputs of production. Although applied econometric literature provides numerous estimates of substitution elasticities obtained from flexible functional forms cost or production functions, the number of papers dealing with Constant Elasticities of Substitution (CES) production functions, generally favoured in a CGE framework, is still limited. The contribution of this paper is to estimate the substitution relationship between energy and other inputs for the United Kingdom using a new approach that allows to understand whether a nested CES production function is adequate to describe the true input-output relationship. Moreover, the approach can be used to obtain an indication on which nested structure should is the most appropriate for the data considered. Findings suggest that the analysed dataset might support a four-input nested CES production function where the energy-capital are combined in an inner nest.",
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Lagomarsino, E & Turner, K 2017 'Is the Production Function Translog or CES? An Empirical Illustration Using UK Data' 13 edn, University of Strathclyde, Glasgow, pp. 1-30.

Is the Production Function Translog or CES? An Empirical Illustration Using UK Data. / Lagomarsino, Elena ; Turner, Karen.

13. ed. Glasgow : University of Strathclyde, 2017. p. 1-30.

Research output: Working paperDiscussion paper

TY - UNPB

T1 - Is the Production Function Translog or CES? An Empirical Illustration Using UK Data

AU - Lagomarsino, Elena

AU - Turner, Karen

N1 - Published as a paper within the Discussion Papers in Economics, No. 17-13 (2017)

PY - 2017/12/4

Y1 - 2017/12/4

N2 - Computable general equilibrium (CGE) studies are increasingly interested in informing keys parameters of their models using empirical data. Energy and environmental CGE findings have been found to be particularly sensible to changes in the values of the elasticities of substitution between inputs of production. Although applied econometric literature provides numerous estimates of substitution elasticities obtained from flexible functional forms cost or production functions, the number of papers dealing with Constant Elasticities of Substitution (CES) production functions, generally favoured in a CGE framework, is still limited. The contribution of this paper is to estimate the substitution relationship between energy and other inputs for the United Kingdom using a new approach that allows to understand whether a nested CES production function is adequate to describe the true input-output relationship. Moreover, the approach can be used to obtain an indication on which nested structure should is the most appropriate for the data considered. Findings suggest that the analysed dataset might support a four-input nested CES production function where the energy-capital are combined in an inner nest.

AB - Computable general equilibrium (CGE) studies are increasingly interested in informing keys parameters of their models using empirical data. Energy and environmental CGE findings have been found to be particularly sensible to changes in the values of the elasticities of substitution between inputs of production. Although applied econometric literature provides numerous estimates of substitution elasticities obtained from flexible functional forms cost or production functions, the number of papers dealing with Constant Elasticities of Substitution (CES) production functions, generally favoured in a CGE framework, is still limited. The contribution of this paper is to estimate the substitution relationship between energy and other inputs for the United Kingdom using a new approach that allows to understand whether a nested CES production function is adequate to describe the true input-output relationship. Moreover, the approach can be used to obtain an indication on which nested structure should is the most appropriate for the data considered. Findings suggest that the analysed dataset might support a four-input nested CES production function where the energy-capital are combined in an inner nest.

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KW - nested CES

KW - input separability

KW - general equilibrium

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BT - Is the Production Function Translog or CES? An Empirical Illustration Using UK Data

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Lagomarsino E, Turner K. Is the Production Function Translog or CES? An Empirical Illustration Using UK Data. 13 ed. Glasgow: University of Strathclyde. 2017 Dec 4, p. 1-30.