The Aggregate Importance of Intermediate Input Substitutability / Alessandra Peter, Cian Ruane.

Format:

Book

Author/Creator:

Peter, Alessandra.

Contributor:

National Bureau of Economic Research.

Ruane, Cian.

Series:

Working Paper Series (National Bureau of Economic Research) no. w31233.

NBER working paper series no. w31233

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

We estimate long-run elasticities of substitution between intermediate inputs for Indian manufacturing plants. India's trade liberalization in the early 1990s provides an ideal natural policy experiment, with permanent and heterogeneous tariff reductions inducing changes in relative prices which we use for identification. We find a high degree of substitutability at the plant-level between 8 broad categories of material inputs, significantly above the Cobb-Douglas benchmark of 1. In contrast, we find elasticities less than 1 between energy, materials, and services as well as between value added and intermediates. We embed our elasticities in a general equilibrium model with a rich input-output structure to quantify their importance. Relative to a Cobb-Douglas benchmark, the aggregate gains from trade are 9% larger when intermediate inputs are substitutes, and come hand in hand with 40% more reallocation of labor across sectors. Furthermore, the aggregate gains from closing the India-U.S. TFP gap in any one sector are on average 29% larger with our estimated elasticities; losses from misallocation of intermediate inputs are more than 3 times larger.

Notes:

Print version record

May 2023.