GTAP Resources: Resource Display
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"A Locally Flexible, Globally Regular Logit Cost Function" by Rutherford, Thomas Abstract The nested constant-elasticity-of-substitution (CES) function has been the predominant functional form used to model relationships across production inputs in calibrated economic equilibrium models. This paper introduces an alternative – the CRTS logit. The paper derives the logit specification from core principles which portray the production process as a set of tasks, each of which is performed with one of n factors of production. Random variations in factor cost for each task are generated by a Gumbel distribution. In the partial equilibrium setting this leads to the conventional multinomial logit which has been widely applied in transport and spatial equilibrium models. A reformulation of the conventional model is required to represent an n -factor, constant-returns-to-scale (CRTS) cost function. The paper shows how to implement the logit in applied general equilibrium models, in- cluding calibration, input demand functions and an equation which implicitly defines unit cost. Comparative static formulae characterizing local behavior of the logit specification reveal local equivalence to the CES model. Hence, based on Perroni and Rutherford (1995)¹, the nested CRTS Logit model can calibrated to any negative semidefinite Slutsky matrix, and the resulting model remains monotone and convex over the full price simplex. In conclusion, the paper provides a numerical comparison of the nested CRTS logit with the standard nested CES. Illustrative numerical examples are provided for the two and three-factor cases, and for a 23 region, 65 sector GTAP model. These findings highlight the usefulness of this new functional form for second order sensitivity analysis of policy simulation results. |
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- Advances in quantitative methods |
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Public Access  Paper (183.2 KB) Replicated: 0 time(s)Restricted Access No documents have been attached. Special Instructions No instructions have been specified. |
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Last Modified: 9/15/2023 1:05:45 PM
