Can Weak Substitution be Rehabilitated?

This paper develops a graphical analysis and an analytical model that demonstrate how weak substitution can be used for non-market valuation. Weak complementarity and weak substitution represent preference restrictions that allow us to develop equivalent price changes to describe quantity or quality changes in non-market goods. The price changes are Hicksian equivalents in that they yield the same utility changes as would the quantity or quality changes. After discussion of several potential applications of weak substitution, the paper develops the parallel between the restriction and recent strategies from modeling differentiated goods.     

Limits to Substitution Between Ecosystem Services and Manufactured Goods and Implications for Social Discounting

This paper examines implications of limits to substitution for estimating substitutability between ecosystem services and manufactured goods and for social discounting. Based on a model that accounts for a subsistence requirement in the consumption of ecosystem services, we provide empirical evidence on substitution elasticities. We find an initial mean elasticity of substitution of two, which declines over time towards complementarity. We subsequently extend the theory of dual discounting by introducing a subsistence requirement. The relative price of ecosystem services is non-constant and grows without bound as the consumption of ecosystem services declines towards the subsistence level. An application suggests that the initial discount rate for ecosystem services is more than a percentage-point lower as compared to manufactured goods. This difference increases by a further half percentage-point over a 300-year time horizon. The results underscore the importance of considering limited substitutability in long-term public project appraisal.     

The Collective Household, Household Production and Efficiency of Marginal Reforms

Most research on the welfare properties of taxes employs the unitary model of the household, ignoring household production. A simple model provides expressions for the changes in individual utility given marginal reforms to government policy. It is shown that the burden of a higher tax on household goods falls on the household member that consumes more than they produce or purchase. Numerical calculations show that price substitution (complementarity) between home and market labor increases (decreases) aggregate efficiency costs of a marginal redistribution of income without impacting the intra-household distribution of utility changes. Modeling household goods as public versus private can alter the distributional consequences of marginal reforms.     

How product innovation in the North may immiserize the South : A new look at the Ricardian model with a continuum of goods

The paper proposes a theoretical model investigating the welfare consequences of technological shocks in a Ricardian framework (a la Dornbush, Fisher and Samuelson, 1977). Contrary to the existing literature, the model incorporates a nonhomothetic demand function whose price and income elasticities are endogenously determined by technology. Nonhomothetic preferences are modeled as the result of the hierarchical consumption of luxury and necessity goods. The nature of technical progress determines the consumption pattern and notably the magnitude of the substitution effect between necessities and luxuries. The model is applied to the case of trade between two economies with different development levels. It is shown in particular that the developing country can suffer a fall in utility as a result of technical progress in the developed country biased towards luxury goods. This configuration depends on the size of the development gap and reflects the fact that Southern goods are less attractive, the higher the range of goods consumed. This result suggests that there is an optimal level of development gap to avoid LDCs being harmed by technical progress in the North.     

The Antonelli Versus Hicks Elasticity of Complementarity and Inverse Input Demand Systems

A true measure of input substitution associated with exogenous changes in input quantities requires that the output level be held constant. To this effect, this study presents the Antonelli elasticity of complementarity characterised by the distance function. The more common Hicks elasticity of complementarity assumes that marginal cost is constant and hence does not capture pure substitution effects. The two elasticities of complementarity are related to inverse demand systems and are shown to be equivalent under constant returns to scale. A framework for estimating the Antonelli elasticity from the uncompensated demand system is presented. Estimation results reveal substantial bias of input substitutability with the use of Hicks' measure.     

Urbanization in a developing country: city size and population composition

Reasons for the high correlation between city size and educational attainment in developing countries are explored. "Two explanations are examined. First, the types of goods produced in larger cities require relatively high skill labor inputs. Second, public and perhaps private services demanded by higher skill people are only offered in larger cities. The paper econometrically tests these hypotheses for Brazil, estimating the elasticities of substitution (or typically complementarity) between high and low skill labor and the 'bright lights' effect for high versus low skill labor."     

Complementarity,Linkages between Firms,and the Effect of Entry Costs on Productivity

In a general equilibrium model where firms are heterogeneous in terms of productivity, we introduce differentiated goods in production that are not perfect substitutes, as well as intermediate inputs needed to produce those goods. We show that an increase in either the complementarity of differentiated goods or the share of intermediate inputs in gross output, significantly increases the negative effect of entry costs on total factor productivity (TFP) and output per worker. We also find that the effect of complementarity is quantitatively stronger. If we assume an empirically plausible value for the elasticity of substitution between differentiated goods, then the model considerably improves its ability to reproduce the observed negative relationship between entry costs and TFP or output per worker.     

Price, unit value, and quality demanded

Given the paucity of quality price data, it is common to rely on “unit value” (average expenditure per unit) as a proxy for price, but this is an imperfect proxy if households respond to price increases by substituting to lower quality goods. This paper draws on survey data that contain both unit value and price to estimate the severity of quality substitution in Indonesia, finding that it is prevalent. The paper next calculates price elasticities that correct for quality substitution, evaluating and ultimately rejecting a commonly used method for calculating price elasticities using only unit value data. Finally, it demonstrates that quality substitution can result in biased price elasticities even when price is perfectly observed.     

V-Branch: A generalized utility function

Much of the work in demand theory is restricted by the functional form of the relationship The S-Branch utility function, which is a generalization of the linear expenditure system, corrects many of the restrictions. Many faults, however, still exist. The Allen partial elasticities of substitution are equal and constant for all commodities from different subsets of the function. The V-Branch utility function corrects many of these faults. The Allen partial elasticities of substitution are not restricted to be constant or equal either within or between commodity subsets. They vary according to the amount consumed of each commodity.     

ESTIMATING THE RELATIONSHIP BETWEEN IMMIGRANT AND NATIVE WORKERS IN AUSTRALIA: A PRODUCTION THEORY APPROACH

The impact of immigration on labour markets depends, among other factors, on the substitutability or complementarity between immigrants and natives. This relationship is examined by treating migrant and native labour, along with capital, as inputs in production process. Estimated price elasticities of substitution between immigrants and native labour suggest that in Australian context, an increase in the wage rate of one group of workers leads to an increased demand for the other. The estimated elasticities of substitution between immigrant and native workers and the complementary relationship between immigrants and capital provide an insight into the complex effects of immigration.     

The Italian Automotive Industry and Economies of Scale

This article investigates scale economies in the Italian automobile industry as well as substitution possibilities between inputs and direct and cross-price elasticities of factor demand, utilizing a cost function with capital, labor, domestic, and imported intermediate goods inputs. Continuing European integration makes economies of scale an important issue. The study results are consistent with economies of scale in the Italian motor vehicle industry, a particularly interesting finding because the Italian automotive industry consists primarily of one firm, Fiat. The estimated direct price elasticities suggest that capital is most responsive to own price changes, and estimated cross elasticities imply that all inputs are substitutes. (JEL D 2, L 6, O 1)     

European Integration and Production in the French Economy

Effects of greater European integration on the French economy are explored with an aggregate cost function. Input direct price elasticities are inelastic, but greatest (absolute value) for capital and lowest for imports. Cross-price elasticities suggest inputs are substitutes and are higher for domestic inputs than domestic input and imports pairs. As trade restrictions fall, effects on domestic input demand may increase as substitution elasticities rise. Inverse output supply price elasticities indicate domestic input prices are relatively important factors affecting consumption goods prices and import prices more important for investment goods. Thus, import price decreases may stimulate investment and growth. (JEL F14 , O10 , O12 )     

Complementarity in contests

To facilitate the study of contests in general equilibrium, we examine winner-take-all contests in which the prize is complementary to the effort of the contestants, as inputs are in production functions or final goods in utility functions. We focus on the effects of technological factors and endowments on the effort and the welfare of the contestants. Most of our findings differ considerably from the standard model of contests in which prize and effort are independent. In particular, we find a critical role for the elasticity of substitution between prize and effort. For example, under low elasticities of substitution, a higher prize reduces the effort exerted by the contestants.     

The CES‐‐Translog Production Function, Returns to Scale and AES

The translog functional form imposes no a priori restrictions on the substitution possibilities between the factor inputs, by relaxing the assumption of strong separability, and the CES–translog cost function specification allows for testing homothetic technology with Hicks‐neutral technical change. In this paper an n ‐factor CES–translog production function is presented which develops the parameters to directly assess scale effects from those due to technology in the production structure. In addition, by applying Shephard's lemma it was possible to derive the input demand functions, as well as the partial elasticities of substitution and the cross‐partial price elasticities of demand for a generalized CES–translog production structure.     

Quotas and the structure of consumer demand

In the direct utility function, quantities axe exogenous, while prices and total expenditure are endogenous. Consequently, this utility function is appropriate for analyzing the impact on prices and total expenditure from an exogenous change in the quantity of a commodity. Such an exogenous change in quantity could occur when quotas change. The direct translog utility function is estimated for a four commodity breakdown of U.S. expenditure. Estimates of quantity elasticities of price and expenditure indicate that domestically produced non-durables are necessities. As a result, the imposition of quotas on these goods will be particularly deleterious to lower income consumers.     

Global restrictions on the parameters of the CDES indirect utility function

This paper extends the analytical and empirical application of the basic indirect utility function of Houthakker–Hanoch—called the CDES specification (constant differences of elasticities of substitution). The non-homothetic CDES preferences are the natural parametric extension on the global domain of the homothetic CES preferences with many commodities, and CDES can conveniently be used in specifying CGE multisector models with a demand side satisfying observable Engel curve patterns. Moreover, all Marshallian own-price elasticities are no longer restricted to exceed one, and positive and negative cross-price effects are allowed for in empirical demand analyses. Explicit calculations of the Allen elasticities of substitution are instrumental in demonstrating the economic implications of the parameters of indirect utility functions with global regularity properties and flexibility of the derived demand systems.     

Import prices and the distribution of personal income

An indirect translog utility function is estimated for U.S. expenditure on domestically produced non-durables, durables, services and consumer imports. Empirical tests lead to the rejection of homogeneity and linear logarithmic utility as valid functional forms. Estimates of expenditure elasticities indicate that imported varieties of consumer goods are luxuries. An exogenous decrease in the price of these goods, which would occur when tariff barriers are relaxed, would be especially beneficial to upper income consumers. Finally, a redistribution of expenditure from upper income consumers to lower income consumers will increase expenditure on domestically produced goods and reduce expenditure on consumer imports.     

Intra-competition between the Asian Four Little Dragons in US Markets

Using an optimizing model of import demands, the degree of competition between the Four Little Dragons in the US market are examined. This paper finds that the exports by Hong Kong can be substituted by Taiwan, and vice versa. Hong Kong and Singapore have some degree of substitution, although Singapore tends to have low elasticities of substitution with Taiwan and South Korea. Moreover, the relatively low own-price elasticities for Singapore and South Korea indicate their exporting goods are up-scaled. This suggests that non-price factors like product quality may be of importance in penetrating the US market.     

Commodity Rates of Interest and Intertemporal Substitution in Commodity Demand and Consumption

This paper examines the role of commodity own rates of interest in intertemporal analysis of consumer behaviour and presents a disaggregate analysis of intertemporal substitution in commodity demand and consumption. Commodity rates of interest are defined from the Euler equations implied by the intertemporal consumer choice problem. The relationship between commodity own rates and the real interest rate is derived, and the conditions for equality of commodity own rates are discussed. The intertemporal commodity substitution elasticities are characterised using commodity rates of interest, and the intertemporal substitution elasticity of consumption is derived from its constituent commodity demands. Evidence from estimation of the demand system and the consumption function reveals high intertemporal substitution for consumer goods as well as consumption.     

A class of changing elasticity of substitution production functions

This paper presents a new class of production functions with a changing elasticity of substitution between two input factors. Over a freely chosen number of intervals for the input factor intensity freely chosen elasticities of substitution can be imposed. The resulting production function can thus account for changing elasticities of substitution during the development of the factor intensity. The production function is applied in a calibration exercise and a novel normalization procedure is proposed. The theory behind this production technology builds on the functional normalization of CES production functions.