General equilibrium models with Morishima elasticities of substitution in production

- Constructs an analytical general equilibrium (AGE) model using the Morishima elasticity of substitution (MES) in production
- Demonstrates advantages of AGE models using the MES formulation
- Highlights the important special case of constant elasticity of substitution (CES) production

Analytical general equilibrium (AGE) models are important tools that economists use to answer questions about theory and policy. When a production function has three or more inputs, the traditional modeling technique employs Allen elasticities of substitution to represent general functional forms. This paper builds an analytical general equilibrium model using the Morishima elasticity of substitution (MES). Specifically, an existing model using Allen elasticities is reformulated to employ the MES and the new, closed-form solutions are interpreted with additional insights from the reformulation. Importantly, the special case of constant elasticity of substitution (CES) production follows directly when using Morishima elasticities, but not Allen elasticities. This paper also provides a general technique for switching from Allen to Morishima elasticities in any existing AGE model and demonstrates a one-to-one numerical equivalence regardless of the elasticity measure employed. Replicating prior results, plausible parameter values are applied to the reformulated model to analyze the source-side, distributional effects of a pollution tax and highlight how the Allen and Morishima elasticities differ.