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The Normalized CES Production Function: Theory And Empirics

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Executive Summary

The elasticity of substitution between capital and labor and, in turn, the direction of technical change are critical parameters in many fields of economics. Until recently, though, the application of production functions with non-unitary substitution elasticities (i.e., non Cobb Douglas) was hampered by empirical and theoretical uncertainties. As has recently been revealed, "Normalization" of production functions and production-technology systems holds out the promise of resolving many of those uncertainties. The authors survey and critically assess the intrinsic links between production, factor substitution and normalization.

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