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Empirical estimates of the elasticity of substitution of a KLEM production function without nesting constraints: The case of the Variable Output Elasticity-Cobb Douglas

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  • Malliet, Paul
  • Reynès, Frédéric G.

Abstract

The outcome of Computable General Equilibrium models applied to climate crucially rely on the estimation of elasticities of substitution. We use a generalized production function that overcomes the restriction imposed by a nesting structure of the Constant Elasticity of Substitution (CES) production function assumed in most CGE models. Constructing a panel of 44 countries and 14 periods from the World Input-Output Database (WIOD) tables, we estimate the production functions for 54 sectors using a \textit{Seemingly Unrelated Regression} model. We compare these results to two standard KLEM nesting structures used in CES specification and find direct implications on the estimation results, especially for Capital-Energy substitutability. The more general form of the CES production function on which we rely, the Variable Output Elasticity-Cobb Douglas (VOE-CB) supports substitution between these two inputs.

Suggested Citation

  • Malliet, Paul & Reynès, Frédéric G., 2022. "Empirical estimates of the elasticity of substitution of a KLEM production function without nesting constraints: The case of the Variable Output Elasticity-Cobb Douglas," Conference papers 333423, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:333423
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