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The elasticity of substitution as an engine of growth

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Abstract

This paper characterizes the elasticity of factor substitution in one-sector convex growth models with a general production function. It shows that an elasticity of substitution that is asymptotically greater than one is a sufficient (but not a necessary) condition for the existence of a lower bound on the marginal product of capital, which in turn can lead to unbounded endogenous growth. Hence, an elasticity of substitution that becomes eventually greater than one can counteract the role of diminishing returns to capital. This renders factor substitution a powerful engine of growth.

Suggested Citation

  • Theodore Palivos & Giannis Karagiannis, 2007. "The elasticity of substitution as an engine of growth," Discussion Paper Series 2007_03, Department of Economics, University of Macedonia, revised Dec 2007.
    • Handle: RePEc:mcd:mcddps:2007_03
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    Cited by:

    1. Xue, Jianpo & Yip, Chong K., 2012. "Factor Substitution And Economic Growth: A Unified Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 16(4), pages 625-656, September.
    2. Debdulal Mallick, 2012. "The role of capital‐labour substitution in economic growth," Indian Growth and Development Review, Emerald Group Publishing Limited, vol. 5(1), pages 89-101, April.
    3. Growiec, Jakub & Mućk, Jakub, 2020. "Isoelastic Elasticity Of Substitution Production Functions," Macroeconomic Dynamics, Cambridge University Press, vol. 24(7), pages 1597-1634, October.
    4. Andreas Irmen, 2021. "Automation, growth, and factor shares in the era of population aging," Journal of Economic Growth, Springer, vol. 26(4), pages 415-453, December.
    5. Sriket, Hongsilp & Suen, Richard M.H., 2022. "Sources of economic growth in models with non-renewable resources," Journal of Macroeconomics, Elsevier, vol. 72(C).
    6. Theodore Palivos & Jianpo Xue & Chong K. Yip, 2011. "Illegal Immigration, Factor Substitution and Economic Growth," Discussion Paper Series 2011_10, Department of Economics, University of Macedonia, revised Jun 2011.
    7. Peter McAdam, 2016. "de La Grandville, Olivier: Economic growth: a unified approach," Journal of Economics, Springer, vol. 119(1), pages 91-96, September.
    8. Samuele Ialenti & Guido Pialli, 2024. "The increase in the elasticity of substitution between capital and labour: a repeated cross-country investigation," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 33(3), pages 380-400, April.
    9. Moysan, Gwenaël & Senouci, Mehdi, 2016. "A note on 2-input neoclassical production functions," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 80-86.
    10. Growiec, Jakub, 2013. "A microfoundation for normalized CES production functions with factor-augmenting technical change," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2336-2350.
    11. Xue, Jianpo & Yip, Chong K., 2013. "Aggregate elasticity of substitution and economic growth: A synthesis," Journal of Macroeconomics, Elsevier, vol. 38(PA), pages 60-75.
    12. Jakub Growiec & Peter McAdam & Jakub Mućk, 2021. "On the Optimal Labor Income Share," International Journal of Central Banking, International Journal of Central Banking, vol. 17(70), pages 1-52, October.
    13. Manuel Gómez, 2014. "Optimal size of the government: the role of the elasticity of substitution," Journal of Economics, Springer, vol. 111(1), pages 29-53, February.
    14. Hideki Nakamura, 2010. "Factor Substitution, Mechanization, And Economic Growth," The Japanese Economic Review, Japanese Economic Association, vol. 61(2), pages 266-281, June.
    15. Growiec, Jakub & McAdam, Peter & Mućk, Jakub, 2018. "Endogenous labor share cycles: Theory and evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 87(C), pages 74-93.
    16. Litina, Anastasia & Palivos, Theodore, 2010. "The Behavior Of The Saving Rate In The Neoclassical Optimal Growth Model," Macroeconomic Dynamics, Cambridge University Press, vol. 14(4), pages 482-500, September.
    17. Wong, Tsz-Nga & Yip, Chong K., 2010. "Indeterminacy and the elasticity of substitution in one-sector models," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 623-635, April.
    18. Antony, Jürgen, 2014. "Technical change and the elasticity of factor substitution," Beiträge der Hochschule Pforzheim 147, Pforzheim University.
    19. Manuel A. Gómez, 2020. "Factor substitution, long‐run growth, and speed of convergence in the one‐sector convex endogenous‐growth model," Metroeconomica, Wiley Blackwell, vol. 71(1), pages 2-21, February.
    20. Chris Papageorgiou & Marianne Saam, 2008. "Two‐level CES Production Technology in the Solow and Diamond Growth Models," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(1), pages 119-143, March.

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    More about this item

    Keywords

    Elasticity of Substitution; Endogenous Growth; Convex Models;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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