The Maxwell School

Syracuse University

Syracuse University

- Leontief

- Easy to parameterize but the implicit zero elasticity of substitution is unrealistically
low in most situations.

- Cobb-Douglas

- Also easy to parameterize. Imposes unitary substitution and income elasticities.
The unitary substitution elasticity may or may not be reasonable, but it is well
known from the literature on demand models that few goods have a unitary income
elasticity.

- Constant Elasticity of Substitution (CES)

- Relaxes the imposed substitution elasticities in the Leontief and Cobb-Douglas
models. Does not address the income elasticity problem: income elasticities are
still constrained by the functional form to equal one.

- Linear Expenditure System

- Relaxes the unitary income elasticity assumption. Straightforward to estimate.

- Translog

- Flexible but more difficult to parameterize. Large number of parameters makes
it difficult to estimate on short datasets. Also requires that the curvature restrictions
in the integrability conditions be checked by hand after estimation.

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URL: https://wilcoxen.maxwell.insightworks.com/pages/786.html

Peter J Wilcoxen, The Maxwell School, Syracuse University

Revised 05/20/2004

URL: https://wilcoxen.maxwell.insightworks.com/pages/786.html

Peter J Wilcoxen, The Maxwell School, Syracuse University

Revised 05/20/2004