Discussion Paper No. 107 of 2010 on Are Prior Restrictions on Factor Shares Appropriate in Economic Growth Accounting Estimations?

Abstract

Several studies make different prior assumptions on the magnitude of factor shares and scale of production when accounting for economic growth. The initial Solow estimations, for instance, assumed a capital share of 0.3 and constant returns to scale. Most authors have subsequently used the same restrictions just because they were used in previous studies, even when production in the countries under study may not necessarily be taking place under constant returns to scale, and capital share may be a value not any close to 0.3. This is likely to distort growth accounting estimation results. This study investigates whether these prior restrictions on factor shares and scale of production as commonly used in the literature are appropriate. The paper also examines whether there is any change in the explanatory power of the model when the Solow Model is augmented with human capital accumulation.