The Elasticities of Complementarity and Substitution
This paper argues that the conventional definition of the elasticity of complementarity is not well suited to deal with the case of increasing returns. It proposes a slightly different formula, that uses a distance function formulation instead of a production function. The proposed definition coincides with the Hicksian measure in case the production function displays constant returns. It is more informative in case returns to scale are not constant, as it disentangles entry effects and substitution effects of factor supplies. The new definition is also preferable in that it is fully symmetric with the definition of the elasticity of substitution.
|distance function, elasticity of complementarity, returns to scale, tangency condition|
|Firm Behavior (jel D21), Oligopoly and Other Forms of Market Imperfection (jel D43), Industrial Organization and Macroeconomics; Industrial Structure and Structural Change; Industrial Price Indices (jel L16)|
|Tinbergen Institute Discussion Paper Series|
Broer, D.P. (2004). The Elasticities of Complementarity and Substitution (No. TI 04-101/1). Tinbergen Institute Discussion Paper Series. Retrieved from http://hdl.handle.net/1765/6616