Accounting for productivity: is it OK to assume that the world is Cobb-Douglas?

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 -