Technical change, variable elasticity of substitution and economic growth

Purpose - The purpose of this paper is to explore the properties of the variable elasticity of substitution (VES) production function, and examine the dynamics of growth associated with it. Design/methodology/approach - The VES production function is incorporated into an otherwise standard Diamond overlapping generations model. Findings - Depending on parameter combinations, the economy can achieve a unique and stable steady state akin to that observed in the Solow-Swan model, reach a poverty trap or transition towards an upper bound of per capita capital stock. A special case of the VES production function is also consistent with unbounded growth. Research limitations/implications - The paper is theoretical in nature. Further empirical analysis could shed deeper insights into the results presented in this study. Practical implications - The VES production function, when applied to the context of the Diamond model, can capture a variety of growth experiences observed in the empirical literature. Social implications - In the context of the Diamond model, a higher value of a particular parameter in the production function leads to greater intergenerational income and consumption inequality. Hence, the study provides a potential explanation for intergenerational inequalities observed in practice. Originality/value - The study demonstrates the empirical value of the VES production function in explaining observed differences in factor shares, rewards and elasticities within and between countries over time.