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An Empirical Investigation of Nested Production Functions: A non-linear approach
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Economics.
2015 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

Computable General Equilibrium (CGE) models are commonly used for applied policy research in environmental economics. The elasticities of substitution and production structures used typically differ from model to model, and are often empirically unfounded. Despite this, simulations have shown that the predictions of CGE models are highly sensitive to different production structures and elasticities. This paper estimates elasticities of substitution for nested CES functions with a (K/L)-(E/M) nesting structure, using non-linear, iterative methods. The results indicate that we can reject Cobb-Douglas and Leontief technologies for the economy-wide level production function, but not for individual sectors. Moreover, the results of the paper indicate that non-linear methods might not be optimal if we want to estimate elasticities for classical CGE models, and that other estimation procedures – which imposes restrictions more similar to those implied by the models – might be preferable.

Place, publisher, year, edition, pages
Keyword [en]
Computable General Equilibrium Models; Elasticity of substitution; CES production functions; Non-linear optimization
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URN: urn:nbn:se:uu:diva-256341OAI: oai:DiVA.org:uu-256341DiVA: diva2:825057
Available from: 2015-06-23 Created: 2015-06-23 Last updated: 2015-06-23Bibliographically approved

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