Reliability study on the common three methods of substitution parameter estimation

摘要

AbstractA good estimation with high reliability of substitution parameter is the premise of all kinds of economical analyses with CES function. With great limitation of data availability, more or less compromises were adopted in most domestic literatures for substitution parameter estimation. But no one knows if those compromises are acceptable or not? In this paper, three popular methods to estimate parameters of CES function were compared in theoretical and empirical way, with a special angle of parameter unit. It was found that the unit of parameter directly and remarkably affects the results of estimation, and only the method of estimating with the first order condition (FOC for short) of CES production could produce reasonable and stable estimation of substitution parameter, while the estimation results of the other two methods were deeply involved in the influence of variable unit. Therefore, the FOC model was strongly recommended in most case of substitution parameter evaluation, unless full evidence of its value, zero near enough.