CMStatistics 2022: Start Registration
View Submission - CFE
Title: Identifying the elasticity of substitution with biased technical change: A structural panel GMM estimator Authors:  Arvid Raknerud - Statistics Norway (Norway) [presenting]
Thomas von Brasch - Statistics Norway (Norway)
Trond Vigtel - Statistics Norway (Norway)
Abstract: The aim is to provide a structural panel GMM estimator (P-GMM) of the elasticity of substitution between capital and labour that does not depend on external instruments, and which can also be applied in the presence of biased technical change. We identify the conditions under which P-GMM yields unbiased estimates and compare it to a fixed effects estimator, which is unbiased when factor prices are exogenous. Using a Monte Carlo study, we examine the properties of the proposed P-GMM estimator. The fixed effects estimator is found to be heavily downward biased in the presence of simultaneity. In contrast, the P-GMM estimator is nearly unbiased, provided the number of time periods $T$ is not too small (say, more than 10). We apply the estimator to a sample of manufacturing firms in Norway. In our application, with an unbalanced sample and $T$ equal to 12, we estimate the elasticity of substitution to be 1.8 using P-GMM and 1.0 using a fixed effects estimator. Hence, neglecting simultaneity may lead to the conclusion that capital and labour are complements when, in fact, they are substitutes.