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Capital-labor substitution and equilibrium indeterminacy

  • Guo, Jang-Ting
  • Lansing, Kevin J.

This paper examines the quantitative relationship between the elasticity of capital-labor substitution in production and the conditions needed for equilibrium indeterminacy (and belief-driven fluctuations) in a one-sector growth model. With variable capital utilization, the substitution elasticity has little quantitative impact on the minimum degree of increasing returns needed for indeterminacy. However, when capital utilization is constant, a below-unity substitution elasticity sharply raises the minimum degree of increasing returns because it imposes a higher effective adjustment cost on labor hours. Overall, our results show that empirically-plausible departures from the Cobb-Douglas production specification can make indeterminacy more difficult to achieve.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 12 (December)
Pages: 1991-2000

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:12:p:1991-2000
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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