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The Fisher/Cobb-Douglas Paradox, Factor Shares, and Cointegration

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  • Robert S. Chirinko
  • Debdulal Mallick

Abstract

This note uses insights from cointegration analysis to reexamine two separate but related issues concerning the estimation of production function parameters. Fisher (1971) documented a paradox in estimating substitution elasticities -- the puzzling divorce between the technology underlying his simulated data and the technology estimated from these data. This note both resolves the Paradox and, based on this resolution, raises important questions about estimation strategies (pioneered by Caballero, 1994) that rely on cointegration to recover production function parameters.

Suggested Citation

  • Robert S. Chirinko & Debdulal Mallick, 2007. "The Fisher/Cobb-Douglas Paradox, Factor Shares, and Cointegration," CESifo Working Paper Series 1998, CESifo.
    • Handle: RePEc:ces:ceswps:_1998
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    References listed on IDEAS

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    1. Caballero, Ricardo J., 1999. "Aggregate investment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 12, pages 813-862, Elsevier.
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    3. Caballero, Ricardo J, 1994. "Small Sample Bias and Adjustment Costs," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 52-58, February.
    4. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007, Elsevier.
    5. Jesus Felipe & Carsten Holz, 2001. "Why do Aggregate Production Functions Work? Fisher's simulations, Shaikh's identity and some new results," International Review of Applied Economics, Taylor & Francis Journals, vol. 15(3), pages 261-285.
    6. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
    7. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
    8. Carmichael, Jeffrey & Stebbing, Peter W, 1983. "Fisher's Paradox and the Theory of Interest," American Economic Review, American Economic Association, vol. 73(4), pages 619-630, September.
    9. J. B. Taylor & M. Woodford (ed.), 1999. "Handbook of Macroeconomics," Handbook of Macroeconomics, Elsevier, edition 1, volume 1, number 1.
    10. Eicher, Theo S & Turnovsky, Stephen J, 1999. "Non-scale Models of Economic Growth," Economic Journal, Royal Economic Society, vol. 109(457), pages 394-415, July.
    11. Shaikh, Anwar, 1974. "Laws of Production and Laws of Algebra: The Humbug Production Function," The Review of Economics and Statistics, MIT Press, vol. 56(1), pages 115-120, February.
    12. Solow, Robert M, 1974. "Law of Production and Laws of Algebra: The Humbug Production Function: A Comment," The Review of Economics and Statistics, MIT Press, vol. 56(1), pages 121-121, February.
    13. Blough, Stephen R, 1992. "The Relationship between Power and Level for Generic Unit Root Tests in Finite Samples," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(3), pages 295-308, July-Sept.
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    Cited by:

    1. Robert S. Chirinko, 2008. "ó: The Long And Short Of It," CESifo Working Paper Series 2234, CESifo.

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    More about this item

    Keywords

    production function elasticities; cointegration;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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