Economic elasticities of input substitution using data envelopment analysis.

Abstract

The use of elasticities of substitution between inputs is a standard method for addressing the effect of a change in the mix of inputs used for production from a technical or cost standpoint. Most estimation methods use parametric production or cost functions or frontiers to estimate these elasticities. A potentially useful nonparametric alternative is data envelopment analysis (DEA). The purpose of this paper is to derive elasticities of input substitution for both technical and cost frontiers using DEA, extending the use of this approach in the field of economics and associated fields. The paper provides derivations for both Hicksian (production and cost frontier) and Morishima (cost frontier) elasticities of input substitution, as well as a parsimonious method for estimating them using DEA. The derivations are presented using an agricultural example form Kansas, USA.