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Distributional Effects of Growth and the Elasticity of Substitution

Listed author(s):
  • Marianne Saam

Reforms that promote economic growth have also an impact on the distribution of capital and income. This paper considers the effect of a rise in the elasticity of substitution between capital and labor. It uses the normalized CES function introduced by Klump and de La Grandville. A reform that raises the elasticity of substitution may have an immediate impact on wages. Dynamic effects are studied in the Ramsey model with heterogenous agents by Caselli and Ventura. Two results on a trade-off between growth and equality are obtained: First, divergence in the capital distribution may occur during growth if a low elasticity of substitution is combined with a high profit share or high risk aversion. Simulations show that a small rise in the elasticity of substitution may reinforce this divergence. Second, a higher elasticity of substitution leads to higher income in the future for the whole population, but sometimes at the cost of an absolute decline in present wages. The existence of a trade-off between growth and equality depends crucially on the choice of the point of normalization.

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File URL: http://degit.sam.sdu.dk/papers/degit_09/C009_031.pdf
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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c009_031.

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Length: 17 pages
Date of creation: Jun 2004
Handle: RePEc:deg:conpap:c009_031
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  1. King, Robert G. & Levine, Ross, 1994. "Capital fundamentalism, economic development, and economic growth," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 259-292, June.
  2. Brunner, Martin & Strulik, Holger, 2002. "Solution of perfect foresight saddlepoint problems: a simple method and applications," Journal of Economic Dynamics and Control, Elsevier, vol. 26(5), pages 737-753, May.
  3. King, Robert G & Rebelo, Sergio T, 1993. "Transitional Dynamics and Economic Growth in the Neoclassical Model," American Economic Review, American Economic Association, vol. 83(4), pages 908-931, September.
  4. Deininger, Klaus & Olinto, Pedro, 2000. "Asset distribution, inequality, and growth," Policy Research Working Paper Series 2375, The World Bank.
  5. Glachant, Jerome & Vellutini, Charles, 2002. "Quantifying the relationship between wealth distribution and aggregate growth in the Ramsey model," Economics Letters, Elsevier, vol. 74(2), pages 237-241, January.
  6. 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.
  7. 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.
  8. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
  9. Turnovsky, Stephen J., 2002. "Intertemporal and intratemporal substitution, and the speed of convergence in the neoclassical growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1765-1785, August.
  10. Jaume Ventura & Francesco Caselli, 2000. "A Representative Consumer Theory of Distribution," American Economic Review, American Economic Association, vol. 90(4), pages 909-926, September.
  11. Kaz Miyagiwa & Chris Papageorgiou, 2003. "Elasticity of substitution and growth: normalized CES in the Diamond model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(1), pages 155-165, 01.
  12. Rainer Klump, 2001. "Trade, money and employment in intertemporal optimizing models of growth," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 10(4), pages 411-428.
  13. Easterly, William & Fischer, Stanley, 1995. "The Soviet Economic Decline," World Bank Economic Review, World Bank Group, vol. 9(3), pages 341-371, September.
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