Is it ok to assume the world is Cobb-Douglas?

From a new working paper by Shekhar Aiyar (IMF) and Carl-Johan Dalgaard (University of Copenhagen, DoE):

We use international data on relative factor shares and capital-output ratios to formulate a number of tests for the validity of the CD assumption. We find that the CD specification performs reasonably well for the purposes of cross-country productivity accounting.

You can download the whole paper at the link. The paper is a work in progress, so the “tables” and “figures” are still left blank in the text, even if they are included in the appendix, and that makes it a little bit more difficult to make sense of it all without too much scrolling. However I’ve only just skimmed the paper so far anyway, but I must admit that, for various reasons, I wasn’t all too surprised by the result.

Oh, if you don’t have a clue what the study is about, the Cobb-Douglas production function is the standard production function in economics, primarily because it’s a relatively simple functional form that has a lot of nice mathematical features, which makes it very easy to work with. Here’s wikipedia’s article on the Cobb-Douglas function.

Also, I’d just like to state for the record that insomnia sucks.


May 24, 2009 Posted by | Economics, Studies | Leave a comment