Capital-energy substitution revisited: New evidence from micro data

Abstract

We use micro data for 10,318 plants to estimate elasticities of substitution between energy and capital. We find that energy and capital are substitutes. We also find that estimates of Allen elasticities of substitution – a standard measure of substitution – are sensitive to varying data sets and levels of aggregation. In contrast, estimates of Morishima elasticities of substitution – which are theoretically superior to the Allen elasticities – are more robust. We conclude that micro data provide more accurate elasticity estimates than those obtained from aggregate data and the Morishima elasticities are the preferred measure of factor substitution.