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

Abstract. This study estimates a production function for Turkey taking capital, labor and energy as input factors. The production function estimated is of the CES form with Hicks-neutral technology and constant returns to scale. A nonlinear least squares regression is employed on a dataset for the entire Turkish economy covering a time period of 27 years. The production function parameters provide insights into the elasticity of substitution of capital, labor and energy in Turkey. In particular, it is found that the elasticity of substitution between the capital-labor bundle and energy is, slightly higher than values found in other studies for various countries. This finding shows the relative ease of substitutability of capital-labor with energy for one another in Turkey and provides new insight on a critical parameter for future energy-economy modeling studies related to Turkey and other similar countries with no elasticity estimate. It is thought that the high substitutability for the case of Turkey may be related to the flexibility of its rapidly growing economy with investment needs that can easily be adapted to market conditions. Keywords. Substitution elasticities, CES, Energy economics. JEL. D22, E23, Q40.