The Review of Economic Studies, Ltd.

Production Functions with Constant Elasticities of Substitution

Author(s): Hirofumi Uzawa
Source: The Review of Economic Studies, Vol. 29, No. 4 (Oct., 1962), pp. 291-299
Published by: Oxford University Press
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Production Functions with Constant
Elasticities of Substitution 1

I. In the present note, we are concerned with characterizing the class of production
functions for which elasticities of substitution are all constant regardless of factor prices.
II. In the case of two factors of production, the characterizationof such production
functions was discussed by Arrow, Chenery, Minhas, and Solow [2].
Let f (xl, X2) be a production function where x1 and x2 resepctively represent the
amounts of factors 1 and 2 employed. Production is assumed to be subject to constant
returns to scale and to diminishing marginal rates of substitution. As is discussed in
Hicks [3], pp. 241-46, the elasticity of substitution a may be defined by:
af af

(1) (La 2f
f(X1,X2) Xa2

It has been shown in [2] that the elasticity of substitution C is constant regardless of
factor inputs x1 and x2 if and only if the production function f(x1,x2) is of the following
form:
- 1/3
(2) f(x1,x2) - (olxl-P + OC2X2-0),
where al and M2are positive constants and

(3) 1.

The production function of the form (2) was first introduced by Solow [8] as an ex-
ample to illustrate his model of economic growth.
III. The elasticity of substitution may be in several ways generalized to the case in
which more than two factors of production are involved.2 In what follows, we shall adapt
the definition of partial elasticities of substitution as introduced in Allen [1], pp. 503-9.
Let the number of factors of production be n and f(x) = f (x1, . . ., xn) a production
function; x1, . .. , x. representthe amounts of factors of production 1, .. . , n employed.

1 This work in part was supportedby the Office of Naval Research under ContractNR-047-004 at
Stanford University and was written while the author was a Fellow at the Center for Advanced Study
in the BehavioralSciences. He is very much indebtedto Dan McFaddenand Marc Nerlove for valuable
commentsand suggestions.
2
For the definitionof the elsaticityof substitution,see, e.g., Hicks [3], p. 117; Lerner[4]; Robinson
[5], pp. 256-7; Allen [11, pp. 340-3, pp. 503-9.

291

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292 REVIEW OF ECONOMIC STUDIES

It is again assumed that production is subject to constant returns to scale and to diminish-
ing marginal rates of substitution. Allen's paiitial elasticity of substitution as?>between
two factors of production, say factors i and j (i - j), is defined by:

(4l
(4) Gi.j fj + . *. + xtfn, Fi1
F
where
(3f Fi2f
ft =Axftg -
xiaxi'

O, f1,..., fl 7

F det
Ifl,f 1 *. f In

.fn, .finil,. .. , Axn

and Fij is the co-factor of the elementfij in the determinant F.

By definition (4), oyiare symmetric; i.e.,

(5) ;j :-a ', for all i 1j.

IV. Before we investigate the implications of constancy of partial elasticities of

substitution aij, we shall first transform the definition (4) into one in terms of the
unit cost function.
Let p (Pl, . . ., p) be a vector of prices of factors of production; pi are assumed
all positive. The vector x = (xi, . . ., xn) of factor inputs that minimizes the unit cost
n
z pIXI

subject to
f (x1, * X.) I

is uniquely determined. We may write

X1 = x1(P), . ., x- Xn(P),
n
XA(#) = pixi(p).
i== I

The function ?(p) will be referred to as the unit cost function associated with
the production function f(x). The factor input functions xi(p) are all homogeneous of
degree zero, while the unit cost function X(p)is homogeneous of degree one.
In what follows it will be assumed that the factor input functions xi(p) are positive
for all p > 0 and have continuous partial derivatives of the third order.
The definition (4) may be written as (see Allen [1], p. 508)

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 CONSTANT ELASTICITIES OF SUBSTITUTION 293

axt

(6) apj for i # j.

XiXj

Since we have the following relations (see, e.g., Samuelson [6], p. 68):
ax

and
(8) aXj == ,. n,

the elasticity of substitution aj may be written:

a2X

(9) 61j= a ax for i #1j

a])i aPi

where X- =A(p) is the unit cost function.

Let
(10) A = A(p) = log A(p);

then, the relation (9) is equivalent to the following:

aI)i apj
ij7
-
=baAaA, for ij,
api api
or
a2A aA aA
(1 (cj-1)a -' --, for i ]j.

V. The production function which extends the Arrow-Chenery-Minhas-Solow

function to the n-factor case may be the following type:
-111
(12) f(xi, - -, Xn) = (aXiX + * * * + l

where xl, . . ., , are positive constants and X a number greater than -1.

The function f(xl, . . ., x,,) is homogeneous of degree one, strictly quasi-concave,

and has partial derivatives of any order. The unit cost function associated with
the production function f(xl, . . ., x,) is given by:

(13) x(p1, , pn) (olP1l + + '(TP' ,)

where

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294 REVIEW OF ECONOMIC STUDIES

1
(14) a-1 -

Hence,

(15) Jj = a, for all i

j.
Therefore,if the productionfunction f(xl, .. ., Xn) is of the form (12) then the partial
elasticities of substitutionOij are independentof factor prices and are identicalfor all pairs
of two factors of production.
On the other hand, if partial elasticities of substitutionaij are all constant and identical
for differentpairs offactors, then the productionfunction f (xl, . . ., xn) is of theform (12).
In order to prove the latter statement, it suffices to show that if elasticities of sub-
stitution aij are constant and identical, say equal to a, then the unit cost function
X(P, .. ., pn) must be of the form (13), since by Shepherd's duality theorem ([7], pp. 17-22)
the unit cost function uniquely determines the production function (in the case of
constant returns to scale). In the case where a == 1, it is easily shown from (11) that
A = log X is additive. But the unit cost function X X(pj1, . . , pn) is homogeneous
of degree one; hence it must be the limit of the form (13) as a tends to one:
X(Pl, - ..,Pn) P
=Pp . . .P n, with o' , .. ., > 0.
In the case where a - 1, consider the following transformation:
z = X1-, P Us = -i, i = 1, . .., n.
Then from (9) and (15) we have
32z
A
= 0, for i ] j.

But, the function z = z(u, .. , un)is homogeneous of degree one with respect to l1, .. , Un;
hence, z is a linear function of ul, . . ., un. Therefore, the unit cost function
X(P,... * *, pn) is of the form (13).
VI. The problem naturally would arise if it were possible to find a production func-
tion with more than two factors of production for which elasticities of substitution are
all constant but may differ for different pairs of factors of production.
Let { N, . . ., Ns } be a partition of the set {, . . ., n } of n factors of production;
namely
Nl u *.. u Ns = {1,. . ., n},
Ns n Nt = empty, for all s A t.
The vector x = (xl, . . ., xn) may be correspondingly partitioned into a set of sub-
vectors:
x = (x(1), .... X(),

where x(s) is the subvector of x whose components are xi, i E Ns. Similarly for price
vectorp = (P, . . ., pn):
p = (p(, . .., p(S)).

Consider now a production function f(x) defined by:

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 CONSTANT ELASTICITIES OF SUBSTITUTION 295
s
(16) f (x) = rif (s (X(S)) ps,
s51
where

(17) fi() (x(s)) = ( o.xi-PS)

ieNs

as > 0,
-1 < < 0D, Ps :
0.

Ps > 0, £s- ps -- 1.
S=1

The production function f(x) defined by (16) is homogeneous of degree one, strictly
quasi-concave, and has partial derivatives of any order.
The unit cost function X(p)is easily derived ; namely,
s ps
(18) X(p) = a H [(s5)(p(s))]
s=l

where a is a positive constant and

(19) X(S)(ps) = ( as pl7C) 1-as

ieNs

with
as = + Ps

is the unit cost function associated with the production function f(s) (x()),
s - 1, . . . S.

Hence,
(20) A(p) = log X(p) = A + Z ps(A) (p(),

where A is a constant and

(21)
(21) A5>(p(<))
AM
(p(O)
=
__1 1 log (z aa
1pi,--a),
S) s = 1, . . ., S.

Partial elasticities of substitution arj are calculated from the formula (11); we have

r1, if i E Ns, j E Nt, s % t,

(22) Gi =
cas, if i, j e Ns.

The foregoing analysis may be summarized by the following:

Theorem 1. Let a productionfunction f (x) be of the form:

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 p

296 REVIEW OF ECONOMIC STUDIES

S ps
(16) f(x) -H f (S (S))

s
Ps > 0, E ps = 1,
s=I
and
s
(17) f(s) (x(s)) = (E ,
ixi-0s)
isNs

xi > 0, i -- 1, . . . n,
-1 < fs < P 1- 0,
, fB, ° s 1, . n.
Thenpartial elasticities of substitutionaij ar-eall constant and

f l, if i N, j e Nt, s ~ t,
(22)= 0
kas, if i, je Ns,
where

(23)1. '-5 1 i-

VII. In what follows, we shall show that the class of the production functions of
the form (16) exhausts all possible linear and homogeneous production functions with
constant partial elasticities of substitution; namely, we have:

Theorem2. Let a productionfunction f (x), x = (x, . .., xn), be homogeneous of

degree one, strictly quasi-concave,and possess continuouspartial derivatives of third order.
If partial elasticities of substitution aij are constantfor all pairs of factors of production,
i and j, then there exists a partition { N, . . ., Ns } of the set { 1, . . ., n } of n factors of
productionsuch that for partial elasticities of substitutionaij the relations (22) hold and the
productionfunction f (x) is of the form (16) with

1
(24) sf3 -- - 1, s - 1, . . ., S.

Proof. Let us first prove that if crj are constant for all pairs of factors of production,
there exists a partition { N, . . . , Ns } of the set { 1, .... , n } such that the realtions (22)
hold.

Differentiating both sides of the relation (11) with respect to pk, we get

03A a2A aA a2A aA

aPk alP aP (j ) apk api apk aPj
aPij aP'

which, in view of (I11), implies that

(25 - 1))A aA -
(25)
a3A
aA _ Ji
(Gl
{A
) { (Jk- (jkI) - A}
aA-ap
aPk, api api aPi aPI apk

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 CONSTANT ELASTICITIES OF SUBSTITUTION 297

for all distinct i, j, and k.

Interchanging i and k in (25), we get

CA____ aA aA aA
(26) -- P (kj l){(ki- I)-(Gji l)}
aPi aPk ap Pk aPj aPi

Since cij are symmetric, xi = positive, and n-- - a - independent of the order
~~Pi i
~GJaPk
of differentiation, we have from (25) and (26) that

(27) (gik - 1) (ai; - l7kj) = 0,

for all distinct i, j and k.

Let us now define a binary relation - between two factors of production i and k
by:

(28) i - k if and only if i- k or '3ik #t1I

We shall prove that the realtion - is an equivalence relation ; namely,

(29) i - i,

(30) i - j implies j -i
and

(31) i -j and -j k imply i- k.

Since (29) and (30) are trivial, we prove only the transitivity relation (31), which may
be implied by the following:

(32) If, for distinct i, j, and k,

i - j and]j k, then aij a;jk -ik.

Let, for distinct i, j, and k,

(33) a # 1 and ajkk 1.

From (27) we have
(34) (-ij - ) (Gjik-- Cjk) 0,

(35) (ajk
-
1) (;i- Gik)
0.

The relations (33), (34) and (35) together imply that

aik a- Gj --^- 6jk # 1-

Since the relation ' is an equivalence relation on the set { 1 . . ., n } there exists a

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298 REVIEW OF ECONOMIC STUDIES

partition {N1, . . ., Ns } of the set {1, . . . , n} such that

(36) i j, if and only if i, j e Ns for some s.

Hence,

(37) aij 1 if i e Ns, j c Nt, s # t

The relation (32) implies the existence of a,, . . ., as such that

(38) aij = as % 1, for all i, j N,, i % j.

The relations (37) and (38) together imply (22).

From (11) and (22), we have

ro, if i ENs, ji e N,, s : t
a2A
(39)
dpi (P i jaA ...A
L j- 1)pt aj ifi, jceNs, i/j.

Hence, there exist S functions o() (p(lO) ..., .(s) (p(s)) such that
s
(40) A(p) = vs) (pIs)),
x=1
whelre
(41) (a' ,- 1) , for i j, i,f E N,.
aptapj api apj
Let
p (s)(p(s)) =
eVs)(ps)), s , . . . ,S.
Theia
S
(42) (p) = s=ln ()(p(s)),
)2 cp(ts) for i
(43) a(s) = Sapay(s)
m _ j Ns i j.

By considering the transformation

t(s)
9s) , pi ---* pi (i Ns),

and taking the homogeneity of the unit cost function )\(p) into account, we have

(44) <p(s)(p(s)) = ( pil-as) , s = 1, . . ., S, with ci > 0 (i e N,).

ieNs

Hence, the unit cost function X(p) is of the form (18). Therefore, by applying

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 CONSTANT ELASTICITIES OF SUBSTITUTION 299

Shepherd's duality theorem ([7], pp. 17-22), the production function f(x) must be of the
form (16).

Q.E.D.

Stanford HIROFUMI UZAWA.

REFERENCES

[I] Allen, R. G. D. MathenmaticalAnalvsis for Economists, London: Macmillan, 1938.

[2] Arrow, K. J., H. B. Chenery, B. S. Minhas, and R. M. Solow. Capital-Labor
Substitution and Economic Efficiency," Review1of Economics and( Statistics, Vol. 63
(1961), pp. 225-250.
[3] Hicks, J. R. The Theori'of Waaes, London: Macmillan, 1932.
"
[4] Lerner, A. P. Notes on the Elasticities of Substitution," Revieit'of EconomicStludies,
Vol. 1 (1933-4), pp. 39-44 and pp. 68-71.
[5] Robinson, J. The Economics of Inq)ewfectCompetitionl,London: Macmillan, 1933.
Analysis, Cambridge: Harvard Uni-
[6] Samuelson, P. A. Foundations of Econiomitic
versity Press, 1947.
[7] Shepherd, R. W. Cost andlProduictionFunctions, Princeton: Princeton University
Press, 1953.
[8] Solow, R. M. "A Contribution to the Theory of Economic Growth," Quarterly
Jouirnal of Econonmics, Vol. 70 (1956), pp. 65-94.

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