TY - JOUR
T1 - Accounting for productivity
T2 - is it OK to assume that the world is Cobb-Douglas?
AU - Aiyar, Shekhar
AU - Dalgaard, Carl-Johan Lars
N1 - JEL classification: O47, O50
PY - 2009
Y1 - 2009
N2 - The development accounting literature almost always assumes a Cobb-Douglas (CD) production function. However, if in reality the elasticity of substitution between capital and labor deviates substantially from 1, the assumption is invalid, potentially casting doubt on the commonly held view that factors of production are relatively unimportant in accounting for differences in labor productivity. We use international data on relative factor shares and capital-output ratios to formulate a number of tests for the validity of the CD assumption. We find that the CD specification performs reasonably well for the purposes of cross-country productivity accounting.
AB - The development accounting literature almost always assumes a Cobb-Douglas (CD) production function. However, if in reality the elasticity of substitution between capital and labor deviates substantially from 1, the assumption is invalid, potentially casting doubt on the commonly held view that factors of production are relatively unimportant in accounting for differences in labor productivity. We use international data on relative factor shares and capital-output ratios to formulate a number of tests for the validity of the CD assumption. We find that the CD specification performs reasonably well for the purposes of cross-country productivity accounting.
KW - Faculty of Social Sciences
KW - development accounting
KW - aggregate production function
KW - elasticity of substitution
KW - total factor productivity
U2 - 10.1016/j.jmacro.2008.09.007
DO - 10.1016/j.jmacro.2008.09.007
M3 - Journal article
SN - 0164-0704
VL - 31
SP - 290
EP - 303
JO - Journal of Macroeconomics
JF - Journal of Macroeconomics
IS - 2
ER -