Directed technical change , estimation of production functions , CES functions , translog functions
Abstract:
Technical change that augments capital and labor input in a non-neutral way plays
an important role in explaining the relation between growth and other macroeconomic
outcomes. Previous research has shown that restricting technical change to be neutral
leads to overestimating the elasticity of substitution between capital and labor. I extend
this line of analysis to misspecification of the functional form. Evidence from Monte Carlo
simulations shows that the problem of biased estimates of the direction of technical change
is relevant in the estimation of aggregate CES and translog production functions. In
particular, I find examples where true technical change is neutral and estimated technical
change is strongly directed towards one factor.
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