A globally concave, monotone and flexible cost function: derivation and application (Q2722280)

This paper investigates properties of the CES-DCES cost function and compares it to the more general, but not globally concave, CES-GBC (generalized Box-Cox) cost function. Namely, a cost function that is flexible, globally concave and monotone at any possible vector of input prices is developed and applied. This function is developed as follows. First, the CES-GBC cost function is presented and its properties are analysed, emphasizing the requirements of flexibility and global concavity. Then, the double CES (DCES) function as a special case of the GBC function is developed. The DCES function is shown to be monotone and globally concave. It is not, however, flexible. Next, the CES-DCES function is formed and parameter restrictions are proposed to ensure that it is flexible, globally concave, and monotone in the case of two or three inputs. Finally, it is shown how to modify this method to accommodate more than three inputs.