Production and Cost Functions: Specification, Measurement and Applications by Erkin Bairam

Author:Erkin Bairam [Bairam, Erkin]
Language: eng
Format: epub
ISBN: 9781138716285
Barnesnoble:
Publisher: Taylor & Francis
Published: 2019-11-11T00:00:00+00:00

4 The Box-Cox Transformation as a VES Production Function

Mural Genç and Erkin I. Bairam

I. Introduction

Ever since the introduction of the standard CES production function by Arrow, Chenery, Minhas and Solow (Arrow et al., (1961)), researchers have developed numerous flexible functional forms that allow substitution between inputs to be unrestricted. Naturally, overwhelming attention was given to the functional forms that were linear in parameters. It is, however, not surprising that with the development of easy-to-use software, some attention has been given to nonlinear models lately.

One of these recent attempts, Bairam (1991b), after having suggested that the extended Box-Cox model can be interpreted as CES production function, suggests using a ‘double’ Box-Cox transformation to obtain variable elasticity of substitution between the inputs. The purpose of this short paper is to point out that just using a different transformation for each input in the extended Box-Cox model will suffice to obtain variable elasticity of substitution. The paper includes an application where elasticities of scale and substitution are estimated by using the extended Box-Cox model for a number of OECD countries.

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