Estimation of Substitution Elasticities in Three-Factor Production Functions : Identifying the Role of Energy

Existing estimation methods for multi-factor CES functions require limiting assumptions about the nature of technical change. We demonstrate how a system of equations and a fixed elasticity in the nested process can provide identification for more flexible specifications and for small data samples. We evaluate the role of energy inputs in an aggregate production function using data for Germany. The use of a Cobb-Douglas process for capital and labor by other studies biases elasticity estimates upwards. The estimated low elasticity means that energy availability is a potentially limiting factor for growth and that productivity gains for capital and labor are energy-using