ALTERNATIVE DEFINITIONS OF ELASTICITY OF SUBSTITUTION: REVIEW AND APPLICATION
João Eustáquio de Lima
Abstract
The concept of elasticity of substitution appeared in economic literature in the early 1930s. After that, tlie concept has suffered much criticism and alternative definitions were suggested. The critics and the various definitions do not seem to be well known given the small number of references we find in the literature with respect to this problem. The objective of this paper is to present a quick review of the concept of elasticity of substitution and to present its alternative definitions, which are generalizations of the two-factor case. It is emphasized that, when there are three or more factors of production, the concept of elasticity of substitution is not free of ambiguity. Besides the very well known Allen elasticity of substitution, alternative definitions of Allen-Uzawa, Hicks, Morishima and McFadden are presented and discussed. An attempt is made to show the differences among the definitions and their relevance as an instrument of analysis of factor substitution in the productive process. An application was done with data from electrified farms of the State of Minas Gerais. A trans!og production function was estimated with the objective of showing the nature and degree of substitution between electrical energy and other factors of production. The results showed great coherence among the various types of elasticities, but very important differences were found. Morishima elasticity provides more information about the substitution process of factors of production.
Keywords
References
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