Factor Demand and Substitution in a Developing Country: Energy Use in Mexican Manufacturing

A translog cost function is used to estimate elasticities of substitution and factor demand in a number of Mexican industries (1966-81). The results vary, but factor demand is, on average, quite sensitive and elasticities are of the same order of magnitude as in other studies for both developed and developing countries. This indicates that factor demand does adapt to price changes, even in countries which are dependent on buying technology abroad. It also shows that a policy of heavy subsidies to domestic energy consumption is the main reason for growing energy intensity, thereby casting some light on the allocation costs of such subsidies.