Title: apital-Land Substitution and the Price Elasticity of Demand for Urban Residential Land
Abstract: Production theory forms the basis of many models developed to examine urban spatial structure. The neoclassical concept of the elasticity of substitution between land and non-land (capital and land) input factors is at the heart of these models developed by Muth [1969], Mills [1972], and Kau and Lee [1976b]. Many urban problems, such as decentralization, cannot be completely understood without knowledge about the elasticity of substitution. The most common assumptions have been to arbitrarily constrain the elasticity of substitution to unity using the Cobb-Douglas production function or to assume that the elasticity of substitution is constant, but not necessarily unity, using the constant elasticity of substitution function.1 A number of studies have provided direct estimates based on the CES production function.2 As discussed by Hicks [1932] and Allen [1956], the elasticity of substitution (a) can be variable depending on output and/or factor combinations. Since the capital-land ratio varies significantly across cities, any a priori restriction may lead to possible specification bias. This study estimates the inter-urban variation in the elasticity of substitution between land and non-land input factors in the production of singlefamily housing over time. Section II of this paper develops a model of housing production using the variable elasticity of substitution (VES) production function developed by Revankar [1971]. Kau, Lee and Sirmans [1979] have used this approach to examine intra-urban variations in the elasticity of substitution. Section III provides some empirical estimates for 52 urban areas in 1967, 1971 and 1975. The elasticity of substitution is important in estimating the price elasticity of demand for urban residential land. Recent literature by Muth [1965, 1968, 1969] and Witte [1977] has estimated the price elasticity using aggregate data for the United States. Using the theory of derived demand, since land is an input into housing production, the price elasticity of urban residential land depends upon the price elasticity of demand for housing services, land's share of total value of housing, the elasticity of sub-
Publication Year: 1979
Publication Date: 1979-01-01
Language: en
Type: article
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Cited By Count: 27
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