Estimating energy-capital-labor substitution parameters of nested production functions for China

In most computable general equilibrium (CGE) models that study energy-economic issues, energy-capital-labor substitution is considered in production function. Generally, parameters and elasticity of energy-capital-labor substitution related to China adopted those data from other countries or studies. There exists considerable uncertainty about whether those models can reasonably reflect energy-economic issues in China. In this paper, parameters and elasticity of energy-capital-labor substitution related to China for I I versions of nested production function are econometrically identified, and relevant hypothesis test and analysis conducted. We found that the labor input had little or no impact on China's production functions; consequently, labor input could be reasonably disregarded in establishing China's production functions. Using energy and capital as inputs, we built again the China's production functions. All of the parameters are identified, and their hypothesis tests passed. High uncertainty of substitution elasticity for capital and energy is found, from I to infinity, in new China's production functions in terms of function structure. So, uncertainty of CGE models requires high concern when the are applied to study energy-economic issues in China. Technology progress plays a key role in China's economic development and acts as a determinant factor to ensure increasing returns to scale of China's energy-economic system.