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Accounting for Productivity: Is it OK to Assume that the World is Cobb-Douglas?

Author

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  • Shekhar Aiyar

    (International Monetary Fund)

  • Carl-Johan Dalgaard

    (Department of Economics, University of Copenhagen)

Abstract
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.

Suggested Citation

  • Shekhar Aiyar & Carl-Johan Dalgaard, 2008. "Accounting for Productivity: Is it OK to Assume that the World is Cobb-Douglas?," Discussion Papers 08-14, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:0814
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    References listed on IDEAS

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    2. Mr. Shekhar Aiyar & Mr. Christian H Ebeke, 2016. "The Impact of Workforce Aging on European Productivity," IMF Working Papers 2016/238, International Monetary Fund.
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    7. Alberto BUCCI & Chiara DEL BO, 2009. "On the interaction between public investment and private capital in economic growth," Departmental Working Papers 2009-44, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    8. Norman Maynard, 2016. "Long-Run Growth Differences and the Neoclassical Growth Model," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(3), pages 574-583, September.
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    11. Moralles, Herick Fernando & do Nascimento Rebelatto, Daisy Aparecida, 2016. "The effects and time lags of R&D spillovers in Brazil," Technology in Society, Elsevier, vol. 47(C), pages 148-155.
    12. Mello, Marcelo de Albuquerque e & Rodrigues, André de Souza, 2017. "Development Accounting, the Elasticity of Substitution, and Non-neutral Technological Change," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 71(1), May.
    13. Alberto Bucci, 2012. "Public Capital, Private Capital and Economic Growth," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 120(2), pages 149-180.
    14. Casper Worm Hansen, 2013. "Health and Development: A Neoclassical Perspective," Journal of Human Capital, University of Chicago Press, vol. 7(3), pages 274-295.
    15. Serranito, Francisco, 2013. "Heterogeneous technology and the technological catching-up hypothesis: Theory and assessment in the case of MENA countries," Economic Modelling, Elsevier, vol. 30(C), pages 685-697.
    16. Alberto Bucci & Chiara Del Bo, 2012. "On the interaction between public and private capital in economic growth," Journal of Economics, Springer, vol. 106(2), pages 133-152, June.
    17. Briones Mendoza, Xavier Fernando & Molero Oliva, Leobaldo Enrique & Calderón Zamora, Oscar Xavier, 2018. "La función de producción Cobb-Douglas en el Ecuador," Revista Tendencias, Universidad de Narino, vol. 19(2), pages 45-73, July.
    18. Temple, Jonathan, 2012. "The calibration of CES production functions," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 294-303.
    19. Małgorzata Gawrycka & Aneta Sobiechowska-Ziegert & Anna Szymczak, 2012. "The Impact of Technological and Structural Changes in the National Economy on the Labour-Capital Relations," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 6(1), March.
    20. Niclas Berggren & Christian Bjørnskov, 2022. "Academic freedom, institutions, and productivity," Southern Economic Journal, John Wiley & Sons, vol. 88(4), pages 1313-1342, April.
    21. T.V.S.Ramamohan Rao, 2011. "Contemporary Relevance and Ongoing Controversies Related to the CES Production Function," Journal of Quantitative Economics, The Indian Econometric Society, vol. 9(2), pages 36-57, July.
    22. Dalgaard, Carl-Johan & Jensen, Martin Kaae, 2009. "Life-cycle savings, bequest, and a diminishing impact of scale on growth," Journal of Economic Dynamics and Control, Elsevier, vol. 33(9), pages 1639-1647, September.
    23. Mello, Marcelo de Albuquerque e, 2017. "Another Look at Panel Estimates of the Elasticity of Substitution between Capital and Labor," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 37(2), November.

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