Is the Production Function Translog or CES? An Empirical Illustration Using UK Data

Lagomarsino, Elena and Turner, Karen (2017) Is the Production Function Translog or CES? An Empirical Illustration Using UK Data. Discussion paper. University of Strathclyde, Glasgow.

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Computable general equilibrium (CGE) studies are increasingly interested in informing keys parameters of their models using empirical data. Energy and environmental CGE findings have been found to be particularly sensible to changes in the values of the elasticities of substitution between inputs of production. Although applied econometric literature provides numerous estimates of substitution elasticities obtained from flexible functional forms cost or production functions, the number of papers dealing with Constant Elasticities of Substitution (CES) production functions, generally favoured in a CGE framework, is still limited. The contribution of this paper is to estimate the substitution relationship between energy and other inputs for the United Kingdom using a new approach that allows to understand whether a nested CES production function is adequate to describe the true input-output relationship. Moreover, the approach can be used to obtain an indication on which nested structure should is the most appropriate for the data considered. Findings suggest that the analysed dataset might support a four-input nested CES production function where the energy-capital are combined in an inner nest.