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Measuring Factor Substitution with Neoclassical Models: An Experimental Evaluation

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  • Raymond J. Kopp
  • V. Kerry Smith

Abstract

The purpose of this paper is to evaluate the performance of neoclassical cost functions in estimating input substitution. In contrast to earlier studies, this analysis assumes that the "true" technology is represented by each of three large-scale, engineering, process analysis models. Experimental methods are used to evaluate the effect of the definition of factor inputs, the characteristics of the technologies, and the presence of residual discharge constraints on measures of input association. The findings support the use of approximate significance tests as an integral part of the interpretation of the neoclassical estimates. They suggest that input aggregation reduces the ability of neoclassical methods to isolate input associations. Finally, they indicate that residual discharge constraints can, if ignored in modeling, distort measured substitution relations.

Suggested Citation

  • Raymond J. Kopp & V. Kerry Smith, 1980. "Measuring Factor Substitution with Neoclassical Models: An Experimental Evaluation," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 631-655, Autumn.
    • Handle: RePEc:rje:bellje:v:11:y:1980:i:autumn:p:631-655
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    Cited by:

    1. Phoebus J Dhrymes, 1991. "The Structure Of Production Technology Productivity And Aggregation Effects," Working Papers 91-5, Center for Economic Studies, U.S. Census Bureau.
    2. Patrik Söderholm, 2000. "Environmental Regulations and Interfuel Substitution in the Power Sector: A Generalized Leontief Model," Energy & Environment, , vol. 11(1), pages 1-23, January.
    3. Pettersson, Fredrik & Söderholm, Patrik & Lundmark, Robert, 2012. "Fuel switching and climate and energy policies in the European power generation sector: A generalized Leontief model," Energy Economics, Elsevier, vol. 34(4), pages 1064-1073.
    4. Kopp, Raymond J., 1992. "Economic incentives and point source emissions : choice of modeling platform," Policy Research Working Paper Series 920, The World Bank.
    5. Arie ten Cate, 2006. "The derivatives of complex characteristic roots in the econometric modelling textbook of Kuh et al," CPB Memorandum 165.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    6. Paul Hek & Daniel Vuuren, 2011. "Are older workers overpaid? A literature review," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(4), pages 436-460, August.
    7. B. Muller, Daniel, 2006. "Stock dynamics for forecasting material flows--Case study for housing in The Netherlands," Ecological Economics, Elsevier, vol. 59(1), pages 142-156, August.

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