CES approach to the measurement of induced factor augmentation, a test for Japan

The importance of this hypothesis lies in considering the source of technological change, not as exogenous, but as endogenous to the system within which this change takes place. The various attempts at empirical verification of the hypothesis have also been discussed. A shortcoming of these attempts is that they do not explicitly consider the mechanism which induces the biases. Also, they cannot consider the rate of technical change and its direction within the same model. To overcome this weakness, a more direct test of the induced innovation process is devised with Ahmad"s framework. A factor augmenting CES production function is formulated so as to derive a direct test of the hypothesis that relative factor prices are a determinant of technical change biases. The major objectives of this paper are to demonstrate this approach and to report the results from its application to the case of Japanese agriculture from 1880 to 1940.