Appendix A: Derivation of Mathematical Results
Three-Level Nested CES Production Function
Production function with 4 inputs:
в-
Y
b [aKθ + (1 - a)L ]θ + (1 - b)Lγ
+ (1 - c ) Lβi >
Marginal productivity of labor skill-level 1:
∂ Q β1Γ O л
— = (1 - a)bcL [ aKθ + (1 - a)Lθ ] )
∂L
1
Y
b [ aKθ + (1 - a ) Lθι ]θ
+ (1 - b ) ly2
/
b [ aKθ + (1 - a ) Lθ ]θ + (1 - b ) LY2
У
+ (1 - c ) I
Marginal productivity of labor skill-level 2:
-dQ- = (1 - b ) cL2Y 1)
dL 2
(1-в )
β
L
b [ aKθ + (1 - a ) Lθθ ] ° + (1 - b ) L2
L
b [ aKθ + (1 - a ) Lθi ]" + (1 - b ) L2
Marginal productivity of labor skill-level 3:
— = (1 - c ) L-1)
∂L 3
(1-в )
в
+ (1 - c ) Lβ3 ^
c b [ aKθ + (1 - a ) Lθθ ] ° + (1 - b ) Ly2
(1-в )
в 1“
Y + (1 - c ) /'■
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