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On estimation of the CES production function—Revisited

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  • Henningsen, Arne
  • Henningsen, Géraldine

Abstract

Estimation of the non-linear Constant Elasticity of Scale (CES) function is generally considered problematic due to convergence problems and unstable and/or meaningless results. These problems often arise from a non-smooth objective function with large flat areas, the discontinuity of the CES function where the elasticity of substitution is one, and possibly significant rounding errors where the elasticity of substitution is close to one. We suggest three (combinable) solutions that alleviate these problems and improve the reliability and stability of the results.

Suggested Citation

  • Henningsen, Arne & Henningsen, Géraldine, 2012. "On estimation of the CES production function—Revisited," Economics Letters, Elsevier, vol. 115(1), pages 67-69.
    • Handle: RePEc:eee:ecolet:v:115:y:2012:i:1:p:67-69
    DOI: 10.1016/j.econlet.2011.12.007
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    References listed on IDEAS

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    1. Kai Sun & Daniel J. Henderson & Subal C. Kumbhakar, 2011. "Biases in approximating log production," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(4), pages 708-714, June.
    2. Lloyd, P. J. & MacLaren, D., 2002. "Measures of trade openness using CGE analysis," Journal of Policy Modeling, Elsevier, vol. 24(1), pages 67-81, March.
    3. McFarland, J. R. & Reilly, J. M. & Herzog, H. J., 2004. "Representing energy technologies in top-down economic models using bottom-up information," Energy Economics, Elsevier, vol. 26(4), pages 685-707, July.
    4. Thursby, Jerry G & Lovell, C A Knox, 1978. "An Investigation of the Kmenta Approximation to the CES Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 19(2), pages 363-377, June.
    5. Kemfert, Claudia, 1998. "Estimated substitution elasticities of a nested CES production function approach for Germany," Energy Economics, Elsevier, vol. 20(3), pages 249-264, June.
    6. Rainer Klump & Peter McAdam & Alpo Willman, 2007. "Factor Substitution and Factor-Augmenting Technical Progress in the United States: A Normalized Supply-Side System Approach," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 183-192, February.
    7. Arne Henningsen & Géraldine Henningsen, 2011. "Econometric Estimation of the “Constant Elasticity of Substitution" Function in R: Package micEconCES," IFRO Working Paper 2011/9, University of Copenhagen, Department of Food and Resource Economics.
    8. Chris Papageorgiou & Marianne Saam, 2008. "Two‐level CES Production Technology in the Solow and Diamond Growth Models," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(1), pages 119-143, March.
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    More about this item

    Keywords

    Constant elasticity of substitution; CES function; Estimation; Non-linear least squares;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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