Essays on the elasticity of substitution between capital and labour and biased technological change

Abstract

This study aims to contribute to a deeper understanding of the pivotal role played by the elasticity of substitution between capital and labour over a wide range of topics in economic literature and to estimate the elasticities of substitution and technological change biases, not only for the United States aggregate economy and industry-level, but also for the majority of OECD countries. Although there is no scarcity of studies estimating the elasticity of substitution, they are particularly focused on the United States aggregate economy, overlooking the heterogeneity that exists at the industry-level, and only a few of them cover other geographical scopes. Moreover, these studies are mostly based on a Constant Elasticity of Substitution (CES) production function which, as indicated by its name, is subject to the limitation that the elasticity of substitution assumes a constant value, although not necessarily unity (as the Cobb-Douglas function). It seems reasonable to admit, nevertheless, that the degree of substitutability between production factors can vary with changes in the capital intensity of production and consequently to evaluate the plausibility of a Variable Elasticity of Substitution (VES) functional form.