Modeling Producer Behavior
Modeling Producer Behavior
Production functions in many CGE models use a nest of CES functions which imposes a strong assumption about substitution patterns. Here we describe the implementation of a more flexible translog function where capital, labor, energy and non-energy inputs (KLEM) are chosen symmetrically, i.e. the separability assumptions are weaker. Technical change is key to understanding past performance and to projecting future responses to policy and our functions allow for both autonomous change and endogenous (or, price-induced) technical change. We use latent variables to represent these changes in technology and use the Kalman filter to recover them for the sample period and to project them for the future. This latent variable approach for the biases of technical change is also used for specifying the demand for all intermediate inputs below the top KLEM tier. We describe the econometric results, including the covariance structure that is used later in the confidence interval analysis in Chapter 9. We also summarize the post-War productivity record for our 35 industries.
Keywords: Production function, Translog, KLEM, substitution, autonomous technical change, price-induced technical change, Kalman filter, projecting technical change
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