About "Catch & Research"

Welcome. I found my passion in ecological economics and fishing. They are all about pursuit of unknown and uncertain objects. I always enjoy the seemingly reckless pursuit itself. This blog is a record of my long journey in research and fishing. Your comments are welcome and appreciated.

Thursday, November 29, 2007

CES production function, the way to go!

The Constant Elasticity of Substitution (CES) function is a complicated mathematical function. Benefit of the function is that we can control its parameter of substitution elasticity. The famous Cobb-Douglas production function has fixed unity (=1) elasticity of substitution (Actually, Cobb-Douglas is a special case of the CES function).

However, it is known that the elasticity of substitution is critical in growth model. The elasticity may be more important than saving rate. In a model, higher elasticity of substitution means more feasible indefinite growth. We show this result very easily on simulation. We really need control the elasticity of substitution in our growth model. It is the reason why I have to use the CES production function for my research. I need to verify the range of the elasticity of substitution among production factors, and apply the range in my growth model. I believe that it is the right direction for growth model to go.

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