Substitution elasticities: A theoretical and empirical comparison

Abstract

Estimating the degree of substitution between energy and non-energy inputs is crucial for any evaluation of environmental and energy policies. Yet, given the large variety of substitution elasticities, the central question arises as to which measure would be most appropriate. Apparently, ALLEN’s elasticities of substitution have been the most-used measures in applied production analysis. Using data of the U. S. primary metals sector (1958-1996), this paper empirically illustrates that cross-price elasticities are preferable for many practical purposes. This conclusion is based on a survey of classical substitution measures such as those from ALLEN, MORISHIMA, and MCFADDEN. The survey highlights the fact that cross-price elasticities are their essential ingredients. JEL classification: C3, D2