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The elasticity of substitution as an engine of growth

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Abstract

This paper characterizes the elasticity of factor substitution in one-sector convex growth models with a general production function. It shows that an elasticity of substitution that is asymptotically greater than one is a sufficient (but not a necessary) condition for the existence of a lower bound on the marginal product of capital, which in turn can lead to unbounded endogenous growth. Hence, an elasticity of substitution that becomes eventually greater than one can counteract the role of diminishing returns to capital. This renders factor substitution a powerful engine of growth.

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Bibliographic Info

Paper provided by Department of Economics, University of Macedonia in its series Discussion Paper Series with number 2007_03.

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Date of creation: Dec 2007
Date of revision: Dec 2007
Handle: RePEc:mcd:mcddps:2007_03

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Web page: http://www.uom.gr/index.php?tmima=3

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Keywords: Elasticity of Substitution; Endogenous Growth; Convex Models;

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  1. Boldrin, Michele, 1992. "Dynamic externalities, multiple equilibria, and growth," Journal of Economic Theory, Elsevier, Elsevier, vol. 58(2), pages 198-218, December.
  2. repec:att:wimass:9428 is not listed on IDEAS
  3. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, Springer, vol. 5(1), pages 87-120, March.
  4. 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.
  5. Jones, Larry E. & Manuelli, Rodolfo E., 1992. "Finite lifetimes and growth," Journal of Economic Theory, Elsevier, Elsevier, vol. 58(2), pages 171-197, December.
  6. Klump, Rainer & Preissler, Harald, 2000. " CES Production Functions and Economic Growth," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 102(1), pages 41-56, March.
  7. Jones, Larry E & Manuelli, Rodolfo E, 1990. "A Convex Model of Equilibrium Growth: Theory and Policy Implications," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(5), pages 1008-38, October.
  8. Larry E. Jones & Rodolfo E. Manuelli, 1994. "The Sources of Growth," GE, Growth, Math methods, EconWPA 9410002, EconWPA, revised 05 Mar 1999.
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Cited by:
  1. Antony, Jürgen, 2014. "Technical change and the elasticity of factor substitution," Beiträge der Hochschule Pforzheim, Pforzheim University 147, Pforzheim University.
  2. Hideki Nakamura, 2010. "Factor Substitution, Mechanization, And Economic Growth," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 61(2), pages 266-281.
  3. Litina, Anastasia & Palivos, Theodore, 2010. "The Behavior Of The Saving Rate In The Neoclassical Optimal Growth Model," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 14(04), pages 482-500, September.
  4. Xue, Jianpo & Yip, Chong K., 2013. "Aggregate elasticity of substitution and economic growth: A synthesis," Journal of Macroeconomics, Elsevier, Elsevier, vol. 38(PA), pages 60-75.
  5. Debdulal Mallick, 2012. "Education Briefing: The role of capital-labour substitution in economic growth," Indian Growth and Development Review, Emerald Group Publishing, Emerald Group Publishing, vol. 5(1), pages 89-101, April.
  6. Theodore Palivos & Jianpo Xue & Chong K. Yip, 2011. "Illegal Immigration, Factor Substitution and Economic Growth," Discussion Paper Series, Department of Economics, University of Macedonia 2011_10, Department of Economics, University of Macedonia, revised Jun 2011.
  7. Jakub Growiec, 2011. "A microfoundation for normalized CES production functions with factor-augmenting technical change," National Bank of Poland Working Papers, National Bank of Poland, Economic Institute 98, National Bank of Poland, Economic Institute.
  8. 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.
  9. 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.

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