Calibration of Firms Parameters

Aggregate Production Function and Capital Accumulation

The OG-Core firm theory documentation outlines the constant returns to scale, constant elasticity of substitution production function of the representative firm. This function has two parameters; the elasticity of substitution and capital’s share of output.

Elasticity of substitution

OG-PHL’s default parameterization has an elasticity of substitution of \(\varepsilon=1.0\), which implies a Cobb-Douglas production function.

Capital’s share of output

Philippine national accounts data suggest that the capital share of income is 58.785%. However, we allocate 5% of that to infrastructure investment \(\gamma_{g,m}=0.05\) for all \(m\) and \(\gamma_m=0.53785\). We are simply allocating 5% of the capital share of output to infrastructure investment. We tried a higher percentage of 10% to infrastructure investment, but the steady-state solution would not solve.