Substitution elasticities in an energy-augmented CES production function: An empirical analysis for Turkey

Abstract

Energy is an undebatable key element in today’s modern world. Whether it is the residential sector, services sector or the industry, the role of energy in our lives is highly important. This importance gets only magnified if energy is not produced domestically in the required amounts and therefore needs to be imported at highly set prices, as it is the case for Turkey. All these factors together bring about the question on how dependent on energy the production process for the Turkish economy is. A key parameter for the assessment of this dependency, moreover for the interpretation of the role of energy in the production process, is the elasticity of substitution. The aim of this thesis is to estimate a production function for Turkey, which takes capital, labor and energy as input factors. This production function with its parameters will give insights about the elasticity of substitution of capital, labor and energy. The estimations are carried out on a dataset for the entire Turkish economy covering a time period of 27 years. Due to the differences in technological efficiencies and production structures between countries, there is a need for the adaptation of global estimations on country levels, and the results provide strong evidence supporting the need for country-specific estimations of production functions. Estimated values present relatively higher elasticity of substitution values for Turkey, when compared with values from studies performed on a group of countries.