Input Substitution

The simultaneous influence of increasing oil scarcity, greenhouse gas control and renewable energy targets will result in a future of sustained energy prices. Whether modern economies can find a smooth path away from fossils is a fundamental socio-economic and political question, which according to standard economics depends to a arge extent on the degree of substitution between energy and capital. We study this issue by modelling the manufacturing sector with a translog cost function in seven OECD countries using the EU-KLEMS database for the period 1970-2005. After a literature survey, different production structures accounting for input substitution, returns to scale and technical change are estimated and substitution elasticities derived. Our results indicate complementarity between energy and capital, suggesting that an increase in energy price lowers the capital input, which, in turn, might lead to a lower output.

Purpose The purpose of this study is to examine whether the elasticity of substitution (ES) varies between developed and developing countries. Design/methodology/approach The author derives the growth regressions from the Solow model under the constant elasticity of substitution production function by using the first-order Taylor series expansion and estimate them for each country group classified based on time-varying behavior of income per worker using the data-driven algorithm. Findings The ES is not unitary and varies among country groups. Developed countries generally have a higher ES than developing countries. Originality/value For the first time, the author uses the first-order Taylor series expansion to linearize the steady-state value of income per worker, as the author considers this approach to be relatively more straight-forward and tractable. Furthermore, the author estimates the equations using both cross-section and panel data techniques and employs the data-driven al...

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