Accounting for productivity: is it OK to assume that the world is Cobb-Douglas?

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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.
Original languageEnglish
JournalJournal of Macroeconomics
Issue number2
Pages (from-to)290-303
Number of pages14
Publication statusPublished - 2009

    Research areas

  • Faculty of Social Sciences - development accounting, aggregate production function, elasticity of substitution, total factor productivity

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