Factor Substitution, Income Distribution, and Growth in a Generalized Neoclassical Model
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.
|Date of creation:||Oct 2007|
|Date of revision:||Oct 2007|
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- Chris Papageorgiou & Kaz Miyagiwa, . "Elasticity of Substitution and Growth: Normalized CES in the Diamond Model," Departmental Working Papers 2001-05, Department of Economics, Louisiana State University.
- Klump, Rainer & McAdam, Peter & Willman, Alpo, 2004.
"Factor substitution and factor augmenting technical progress in the US: a normalized supply-side system approach,"
Working Paper Series
0367, European Central Bank.
- 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.
- 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, vol. 90(1), pages 282-291, March.
- Klump, Rainer & Saam, Marianne, 2008.
"Calibration of normalised CES production functions in dynamic models,"
Elsevier, vol. 99(2), pages 256-259, May.
- Klump, Rainer & Saam, Marianne, 2006. "Calibration of normalised CES production functions in dynamic models," ZEW Discussion Papers 06-78, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
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