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Endogenous Aggregate Elasticity of Substitution

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Author Info
Kaz Miyagiwa ()
Chris Papageorgiou

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Abstract

In the literature studying aggregate economies the aggregate elasticity of substitution (AES) between capital and labor is often treated as a constant or “deep” parameter. This view contrasts with the conjecture put forward by Arrow et al. (1961) that AES evolves over time and changes with the process of economic development. This paper evaluates this conjecture in a simple dynamic multi-sector growth model, in which AES is endogenously determined. Our findings support the conjecture, and in particular demonstrate that AES tends to be positively related to the state of economic development, a result consistent with recent empirical findings.

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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0707.

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Date of creation: Mar 2007
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Handle: RePEc:emo:wp2003:0707

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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. Yuhn, Ky-hyang, 1991. "Economic Growth, Technical Change Biases, and the Elasticity of Substitution: A Test of the De La Grandville Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 340-46, May. [Downloadable!] (restricted)
  2. de La Grandville, Olivier, 1989. "In Quest of the Slutsky Diamond," American Economic Review, American Economic Association, vol. 79(3), pages 468-81, June. [Downloadable!] (restricted)
  3. Revankar, Nagesh S, 1971. "A Class of Variable Elasticity of Substitution Production Functions," Econometrica, Econometric Society, vol. 39(1), pages 61-71, January. [Downloadable!] (restricted)
  4. Winford H. Masanjala & Chris Papageorgiou, 2004. "The Solow model with CES technology: nonlinearities and parameter heterogeneity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(2), pages 171-201. [Downloadable!]
  5. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
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  6. 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 c009_030, DEGIT, Dynamics, Economic Growth, and International Trade. [Downloadable!]
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  7. Klump, Rainer & Preissler, Harald, 2000. " CES Production Functions and Economic Growth," Scandinavian Journal of Economics, Blackwell Publishing, vol. 102(1), pages 41-56, March. [Downloadable!] (restricted)
  8. 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)
  9. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March. [Downloadable!] (restricted)
  10. Fisher, Franklin M & Solow, Robert M & Kearl, James M, 1977. "Aggregate Production Functions: Some CES Experiments," Review of Economic Studies, Blackwell Publishing, vol. 44(2), pages 305-20, June. [Downloadable!] (restricted)
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  11. Ventura, Jaume, 1997. "Growth and Interdependence," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 57-84, February.
  12. Tjalling C. Koopmans, 1963. "On the Concept of Optimal Economic Growth," Cowles Foundation Discussion Papers 163, Cowles Foundation, Yale University. [Downloadable!]
  13. Acemoglu, Daron, 2002. "Directed Technical Change," Review of Economic Studies, Blackwell Publishing, vol. 69(4), pages 781-809, October.
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  14. Kamien, Morton I & Schwartz, Nancy L, 1969. "Induced Factor Augmenting Technical Progress from a Microeconomic Viewpoint," Econometrica, Econometric Society, vol. 37(4), pages 668-84, October. [Downloadable!] (restricted)
  15. Kaz Miyagiwa & Chris Papageorgiou, 2003. "Elasticity of substitution and growth: normalized CES in the Diamond model," Economic Theory, Springer, vol. 21(1), pages 155-165, 01. [Downloadable!] (restricted)
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  16. Pedro Cavalcanti Ferreira & Alberto Trejos, 2006. "On The Output Effects Of Barriers To Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(4), pages 1319-1340, November. [Downloadable!] (restricted)
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(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. Robert S. Chirinko, 2008. "ó: The Long And Short Of It," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Elsa Orgiazzi, 2007. "Financial Development And Instability:The Role Of The Labour Share," Working Papers halshs-00353889_v1, HAL. [Downloadable!]
  3. ORGIAZZI, Elsa, 2007. "Financial Development and Instability: the Role of the Labour Share," MPRA Paper 6304, University Library of Munich, Germany. [Downloadable!]
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  4. Ingmar Schumacher & Pierre-André Jouvet, 2009. "Sustainability, resource substitution in energy inputs and learning," Working Papers hal-00356044_v1, HAL. [Downloadable!]
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