ABSTRACT
The principal advantage of the CES production function over the simpler Cobb-Douglas is the removal of the constraint of unitary elasticity of substitution. However, the Cobb-Douglas production function generally performed marginally better than the CES in terms of minimizing mean square error even when the evidence pointed to an elasticity of substitution that was significantly different from unity. Where α and β are the output elasticities with respect to labor and capital. In general, β the output elasticity with respect to capital was the most consistently significant variable, being significantly greater than zero at the five percent level in most equations. The output elasticities cannot be interpreted as factor shares. However they can be interpreted as indicating relative shares under certain conditions. Under conditions of perfect competition in all markets, labor and capital are paid an equilibrium price equal to the value of their respective marginal productivities and these shares would be exactly equal to the output elasticities.
