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Steady-State Growth and the Elasticity of Substitution

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  • Andreas Irmen

    () (University of Luxembourg and CESifo, Munich)

Abstract

In a neoclassical economy with endogenous capital- and labor-augmenting technical change the steady-state growth rate of output per worker is shown to increase in the elasticity of substitution between capital and labor. This confirms the assessment of Klump and de La Grandville (2000) that a greater elasticity of substitution allows for faster economic growth. However, unlike their findings my result applies to the steady-state growth rate. Moreover, it does not hinge on particular assumptions on how aggregate savings come about. It holds for any household sector allowing savings to grow at the same rate as aggregate output.

Suggested Citation

  • Andreas Irmen, 2010. "Steady-State Growth and the Elasticity of Substitution," CREA Discussion Paper Series 10-21, Center for Research in Economic Analysis, University of Luxembourg.
  • Handle: RePEc:luc:wpaper:10-21
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    References listed on IDEAS

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    1. Bester, Helmut & Ritzberger, Klaus, 2001. "Strategic pricing, signalling, and costly information acquisition," International Journal of Industrial Organization, Elsevier, pages 1347-1361.
    2. Miyagiwa, Kaz & Papageorgiou, Chris, 2007. "Endogenous aggregate elasticity of substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 2899-2919, September.
    3. Bester, Helmut & Petrakis, Emmanuel, 2003. "Wages and productivity growth in a competitive industry," Journal of Economic Theory, Elsevier, pages 52-69.
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    6. Saam, Marianne, 2008. "Openness to trade as a determinant of the macroeconomic elasticity of substitution," Journal of Macroeconomics, Elsevier, pages 691-702.
    7. Klump, Rainer & Saam, Marianne, 2006. "Calibration of normalised CES production functions in dynamic models," ZEW Discussion Papers 06-078, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    8. Hellwig, Martin & Irmen, Andreas, 2001. "Endogenous Technical Change in a Competitive Economy," Journal of Economic Theory, Elsevier, pages 1-39.
    9. Irmen, Andreas, 2011. "Steady-state growth and the elasticity of substitution," Journal of Economic Dynamics and Control, Elsevier, pages 1215-1228.
    10. Andreas Irmen & Rainer Klump, 2009. "Factor Substitution, Income Distribution and Growth in a Generalized Neoclassical Model," German Economic Review, Verein für Socialpolitik, vol. 10, pages 464-479, November.
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    Citations

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    Cited by:

    1. Debdulal Mallick, 2012. "The role of capital-labour substitution in economic growth," Indian Growth and Development Review, Emerald Group Publishing, vol. 5(1), pages 89-101, April.
    2. Manuel Gómez, 2016. "Factor substitution is an engine of growth in a model with productive public expenditure," Journal of Economics, Springer, pages 37-48.
    3. Irmen, Andreas, 2011. "Steady-state growth and the elasticity of substitution," Journal of Economic Dynamics and Control, Elsevier, pages 1215-1228.
    4. Jakub Growiec & Jakub Muck, 2015. "Isoelastic Elasticity of Substitution Production Functions," Discussion Papers 15-13, University of Copenhagen. Department of Economics.
    5. Gómez, Manuel A., 2015. "Capital–labor substitution and long-run growth in a model with physical and human capital," Mathematical Social Sciences, Elsevier, vol. 78(C), pages 106-113.
    6. Manuel A. Gómez, 2016. "Factor substitution is an engine of growth in a model with productive public expenditure," Journal of Economics, Springer, pages 37-48.
    7. Andreas Irmen, 2013. "A Generalized Steady-State Growth Theorem," CESifo Working Paper Series 4477, CESifo Group Munich.
    8. Andreas Irmen & Amer Tabakovic, 2015. "Endogenous Capital- and Labor-Augmenting Technical Change in the Neoclassical Growth Model," CREA Discussion Paper Series 15-15, Center for Research in Economic Analysis, University of Luxembourg.
    9. Rainer Klump & Peter McAdam & Alpo Willman, 2012. "The Normalized Ces Production Function: Theory And Empirics," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 769-799, December.
    10. Guglielmo Maria Caporale & Christophe Rault & Robert Sova & Anamaria Sova, 2009. "Trade Specialisation and Economic Convergence: Evidence from Two Eastern European Countries," Discussion Papers of DIW Berlin 875, DIW Berlin, German Institute for Economic Research.
    11. John Heywood & Zheng Wang, 2016. "Consistent location conjectures under spatial price discrimination," Journal of Economics, Springer, pages 167-180.
    12. Antony, Jürgen, 2014. "Technical change and the elasticity of factor substitution," Beiträge der Hochschule Pforzheim 147, Pforzheim University.
    13. T.V.S.Ramamohan Rao, 2011. "Contemporary Relevance and Ongoing Controversies Related to the CES Production Function," Journal of Quantitative Economics, The Indian Econometric Society, vol. 9(2), pages 36-57, July.
    14. Peretto, Pietro F., 2015. "From Smith to Schumpeter: A theory of take-off and convergence to sustained growth," European Economic Review, Elsevier, pages 1-26.
    15. Temple, Jonathan, 2012. "The calibration of CES production functions," Journal of Macroeconomics, Elsevier, pages 294-303.
    16. McAdam, Peter & Muck, Jakub & Growiec, Jakub, 2015. "Will the true labor share stand up?," Working Paper Series 1806, European Central Bank.
    17. Xue, Jianpo & Yip, Chong K., 2013. "Aggregate elasticity of substitution and economic growth: A synthesis," Journal of Macroeconomics, Elsevier, pages 60-75.

    More about this item

    Keywords

    Capital Accumulation; Elasticity of Substitution; Direction of Technical Change; Neoclassical Growth Model.;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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