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Factor Substitution, Income Distribution, and Growth in a Generalized Neoclassical Model

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  • Andreas Irmen

    ()
    (University of Heidelberg, Department of Economics)

  • Rainer Klump

    ()
    (University of Frankfurt, Department of Economics)

Abstract

We analyze a generalized neoclassical growth model that combines a normalized CES production function and possible asymmetries of savings out of factor incomes. This generalized model helps to shed new light on a recent debate concerning the impact of factor substitution and income distribution on economic growth. We can show that this impact relies on both an efficiency and an acceleration effect, where the latter is caused by the distributional consequences of an increase in the elasticity of substitution. While the efficiency effect is always positive, the direction of the acceleration effect depends on the particular savings hypothesis. However, if savings out of capital income are substantial so that a certain threshold value is surpassed we find that the efficiency effect dominates so that higher factor substitution can work as a major engine of growth.

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Bibliographic Info

Paper provided by University of Heidelberg, Department of Economics in its series Working Papers with number 0453.

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Length: 18 pages
Date of creation: Oct 2007
Date of revision: Oct 2007
Handle: RePEc:awi:wpaper:0453

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Keywords: Capital Accumulation; Elasticity of Substitution; Income Distribution; Neoclassical Growth Model;

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  1. de La Grandville, Olivier, 1989. "In Quest of the Slutsky Diamond," American Economic Review, American Economic Association, American Economic Association, vol. 79(3), pages 468-81, June.
  2. Kaz Miyagiwa & Chris Papageorgiou, 2003. "Elasticity of substitution and growth: normalized CES in the Diamond model," Economic Theory, Springer, Springer, vol. 21(1), pages 155-165, 01.
  3. Rainer Klump & Peter McAdam & Alpo Willman, 2004. "Factor Substitution and Factor Augmenting Technical Progress in the US: A Normalized Supply-Side System Approach," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c009_030, DEGIT, Dynamics, Economic Growth, and International Trade.
  4. Klump, Rainer & Saam, Marianne, 2006. "Calibration of normalised CES production functions in dynamic models," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 06-78, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Ben S. Bernanke & Refet S. Gurkaynak, 2001. "Is Growth Exogenous? Taking Mankiw, Romer and Weil Seriously," NBER Working Papers 8365, National Bureau of Economic Research, Inc.
  6. Klump, Rainer & McAdam, Peter & Willman, Alpo, 2008. "Unwrapping some euro area growth puzzles: Factor substitution, productivity and unemployment," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(2), pages 645-666, June.
  7. Olivier de La Grandville & Rainer Klump, 2000. "Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions," American Economic Review, American Economic Association, American Economic Association, vol. 90(1), pages 282-291, March.
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Cited by:
  1. Manuel Gómez, 2014. "Optimal size of the government: the role of the elasticity of substitution," Journal of Economics, Springer, Springer, vol. 111(1), pages 29-53, February.
  2. Bjarne S. Jensen, 2009. "Dynamic Extensions of the Solow Growth Model (1956): Editorial," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 10, pages 378-383, November.
  3. Yoseph Yilma Getachew, 2011. "Public Investment Policy, Distribution, and Growth: What Levels of Redistribution through Public Investment Maximize Growth?," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c016_072, DEGIT, Dynamics, Economic Growth, and International Trade.
  4. Irmen, Andreas, 2010. "Steady-State Growth and the Elasticity of Substitution," Working Papers, University of Heidelberg, Department of Economics 0496, University of Heidelberg, Department of Economics.
  5. Xue, Jianpo & Yip, Chong K., 2012. "Factor Substitution And Economic Growth: A Unified Approach," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 16(04), pages 625-656, September.
  6. Rainer Klump & Peter McAdam & Alpo Willman, 2012. "The Normalized Ces Production Function: Theory And Empirics," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 26(5), pages 769-799, December.

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