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Two-level CES Production Technology in the Solow and Diamond Growth Models

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Author Info
Chris Papageorgiou
Marianne Saam

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Abstract

The two-level CES aggregate production function-that nests a CES into another CES function-has recently been used extensively in theoretical and empirical applications of macroeconomics. We examine the theoretical properties of this production technology and establish existence and stability conditions of steady states under the Solow and Diamond growth models. It is shown that in the Solow model the sufficient condition for a steady state is fulfilled for a wide range of substitution parameter values. This is in sharp contrast with the two-factor Solow model, where only an elasticity of substitution equal to one is sufficient to guarantee the existence of a steady state. In the Diamond model, multiple equilibria can occur when the aggregate elasticity of substitution is lower than the capital share. Moreover, it is shown that for high initial levels of capital and factor substitutability, the effect of a further increase in a substitution parameter on the steady state depends on capital-skill complementarity. Copyright © The editors of the "Scandinavian Journal of Economics" 2008 .

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9442.2008.00529.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Scandinavian Journal of Economics.

Volume (Year): 110 (2008)
Issue (Month): 1 (03)
Pages: 119-143
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Handle: RePEc:bla:scandj:v:110:y:2008:i:1:p:119-143

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Claudia Goldin & Lawrence F. Katz, 1998. "The Origins Of Technology-Skill Complementarity," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 693-732, August. [Downloadable!] (restricted)
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  2. Griliches, Zvi, 1969. "Capital-Skill Complementarity," The Review of Economics and Statistics, MIT Press, vol. 51(4), pages 465-68, November. [Downloadable!] (restricted)
  3. Chris Papageorgiou & Kaz Miyagiwa, . "The Elasticity of Substitution, Hicks' Conjectures, and Economic Growth," Departmental Working Papers 2003-08, Department of Economics, Louisiana State University. [Downloadable!]
  4. Chris Papageorgiou & Kaz Miyagiwa, . "Elasticity of Substitution and Growth: Normalized CES in the Diamond Model," Departmental Working Papers 2001-05, Department of Economics, Louisiana State University. [Downloadable!]
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  5. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
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  6. Francesco Caselli & Wilbur John Coleman II, 2000. "The World Technology Frontier," NBER Working Papers 7904, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Rainer Klump & Olivier de La Grandville, 2000. "Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions," American Economic Review, American Economic Association, vol. 90(1), pages 282-291, March. [Downloadable!] (restricted)
  8. John Duffy & Chris Papageorgiou & Fidel Perez-Sebastian, 2004. "Capital-Skill Complementarity? Evidence from a Panel of Countries," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 327-344, 02. [Downloadable!] (restricted)
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  9. Fallon, P R & Layard, P R G, 1975. "Capital-Skill Complementarity, Income Distribution, and Output Accounting," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 279-301, April. [Downloadable!] (restricted)
  10. Daron Acemoglu, 1998. "Why Do New Technologies Complement Skills? Directed Technical Change And Wage Inequality," The Quarterly Journal of Economics, MIT Press, vol. 113(4), pages 1055-1089, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Pedro de Araujo, 2008. "The Socio-Economic Distribution of AIDS Incidence and Output," Caepr Working Papers 2008-014_updated, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington. [Downloadable!]
  2. David Holland & Sanjoy Bhattacharjee & Leroy Stodick, 2006. "Assessing the Economic Impact of Minimum Wage Increases on the Washington Economy: A General Equilibrium Approach," Working Papers 2006-12, School of Economic Sciences, Washington State University. [Downloadable!]
  3. Arpaia, Alfonso & Pérez, Esther & Pichelmann, Karl, 2009. "Understanding labour income share dynamics in Europe," MPRA Paper 15649, University Library of Munich, Germany. [Downloadable!]
  4. Arnaud Dupuy, 2006. "Hicks Neutral Technical Change Revisited: CES Production Function and Information of General Order," The B.E. Journal of Macroeconomics, Berkeley Electronic Press, vol. 0(2). [Downloadable!]
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