# Production technology estimates and balanced growth

Leon-Ledesma, Miguel A., McAdam, Peter, Willman, Alpo (2015) Production technology estimates and balanced growth. Oxford Bulletin of Economics and Statistics, 77 (1). pp. 40-65. ISSN 0305-9049. E-ISSN 1468-0084. (doi:10.1111/obes.12049)

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http://dx.doi.org/10.1111/obes.12049

## Abstract

Capital-labor substitution and TFP estimates are essential features of many economic models. Such models typically embody a balanced growth path. This often leads researchers to estimate models imposing stringent prior choices on technical change. We demonstrate that estimation of the substitution elasticity and TFP growth can be substantially biased if technical progress is thereby mis-specified. We obtain analytical and simulation results in the context of a model consistent with balanced and near-balanced growth (i.e., departures from balanced growth but broadly stable factor shares). Given this evidence, a Constant Elasticity of Substitution production function system is then estimated for the US economy. Results show that the estimated substitution elasticity tends to be significantly lower using a factor-augmenting specification (well below one). We are also able to reject conventional neutrality forms in favor of general factor augmentation with a non-negligible capital-augmenting component. Our work thus provides insights into production and supply-side estimation in balanced-growth frameworks.

Item Type: Article 10.1111/obes.12049 H Social Sciences > HB Economic Theory Faculties > Social Sciences > School of Economics Miguel Leon-Ledesma 07 Jul 2014 09:50 UTC 29 May 2019 12:45 UTC https://kar.kent.ac.uk/id/eprint/41699 (The current URI for this page, for reference purposes) https://orcid.org/0000-0002-3558-2990