The CDET Profit Function: Could it generate a Parsimonious Agricultural Sector Model?

While the single- output Constant Difference of Elasticities (CDE) cost function has been applied several times, its profit counterpart called “the Constant Difference of Elasticities of Transformation” (CDET) profit frontier has not yet been applied econometrically. It is an indirect, implicit, non-homothetic and non-separable frontier that may be viewed as more flexible than the commonly used CES and Cobb-Douglas specifications, while demanding less parameters to be estimated than fully flexible functional forms commonly do. We therefore introduce the CDET profit function and illustrate its potential usefulness as a parsimonious econometric model of agricultural production in Switzerland. Results indicate plausible elasticities and a satisfactory fit to the data; however, successful estimation requires that certain theoretical characteristics of the CDET are exactly obeyed.