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Comment on “Labor- and Capital-augmenting technical change”: Does the stability of balanced growth path depend on the elasticity of factor substitution?

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  • Bental, Benjamin
  • Li, Defu
  • Tang, Xuemei

Abstract

In a classic paper, Acemoglu (2003) developed a growth model where firms can undertake both labor- and capital-augmenting technological improvements. According to that paper the balanced growth path with purely labor-augmenting technical change is the unique asymptotic (noncycling) equilibrium, and is stable only when capital and labor are gross complements, i.e., only when the elasticity of substitution between these two factors is no greater than 1. Otherwise, the model not only has two other asymptotic steady-state paths, but also the balanced growth path is unstable. The current comment points out that Acemoglu's conclusion ignores the crowding effect in innovation sector that he has proposed due to the assumption of perfect mobility of scientists between sectors. By replacing the perfect mobility assumption with a smooth adjustment process, implicitly invoking the presence of some adjustment costs, this comment not only points out that the factors affecting the direction of technological progress include both the demand side of innovations (relative price and relative market size) and the supply side of innovations (relative marginal productivity of innovation), but also proves that regardless of whether the substitution elasticity is greater than 1 or less than 1, the balanced growth path is not only unique, but also at least locally saddle-path stable.

Suggested Citation

  • Bental, Benjamin & Li, Defu & Tang, Xuemei, 2022. "Comment on “Labor- and Capital-augmenting technical change”: Does the stability of balanced growth path depend on the elasticity of factor substitution?," MPRA Paper 112522, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:112522
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    References listed on IDEAS

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    1. Daron Acemoglu, 2003. "Labor- And Capital-Augmenting Technical Change," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 1-37, March.
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    Cited by:

    1. Li, Defu & Bental, Benjamin, 2023. "What determines the Direction of Technological Progress(2023.11.16)?," MPRA Paper 119211, University Library of Munich, Germany, revised 16 Nov 2023.

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    More about this item

    Keywords

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    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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