| We estimate the elasticity of substitution using two different production functions. The usual Constant Elasticity of Substitution (CES) production function and a Box-Cox production function for Japan (1890–1991), UK (1870–1991), and US (1890–1992; 1929–2000). The main results are that we find the ES to be non-unitary and changing over time. Our findings have implications for economic growth (theoretical and empirical), as production is an increasing function of the ES. The use of a Cobb-Douglas production function, as in most cases in the literature, hides the role of the ES not only as a source of increase in output but also as a source of technical change. Also, we found in a monte carlo simulation that usual CES production usually does not give reliable estimates for the substitution parameter. Finally, using a CES to calculate TFP across countries, we found that variance of TFP is lower than using a Cobb-Douglas. It implies that the importance of TFP to explain income differences across countries is diminished. |
