Energy as a substitute for factors of production: case study of an oil rich economy

ABSTRACT Academic literature and policy notes place great emphasis on the relationship between energy carriers and factors of production. We have evidence from a subsidized economy that provides nationwide energy subsidies; with inferences that partly contradict previous findings. We use a panel of Iranian plants from 2004 to 2013. In 2010, the country conducted an energy reform to increase energy productivity. We use translog functions with SUR and GMM estimators, with clustered and robust standard errors. As a result, the elasticity of energy carriers for labor wages is positive, showing that energy is a substitute for labor on average. The substitution pattern of labor is weakened in parallel with the country's 2010 reform, but not lost completely. Regarding capital, a worsening financial accessibility to the economy after UN sanctions hit the economy in 2012 seemed to have an adverse effect on capital and energy relations.