Is the U.S. Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of Substitution
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CitationAntras, Pol. 2004. Is the U.S. aggregate production function Cobb-Douglas? New estimates of the elasticity of substitution. Contributions to Macroeconomics 4(1): article 4.
AbstractI 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.
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