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THE ELASTICITY OF SUBSTITUTION AS AN ENGINE OF GROWTH

Published online by Cambridge University Press:  15 June 2010

Theodore Palivos  and
Giannis Karagiannis
Theodore Palivos*
Affiliation:
University of Macedonia
Giannis Karagiannis
Affiliation:
University of Macedonia
*
Address correspondence to: Theodore Palivos, Department of Economics, University of Macedonia, 156 Egnatia Street, GR-540 06 Salonica, Greece; email: tpalivos@uom.gr
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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 unity 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 eventually becomes greater than unity can counteract the role of diminishing returns to capital. This renders factor substitution a powerful engine of growth.

Keywords

Elasticity of SubstitutionEndogenous GrowthConvex Models
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Issue 5 , November 2010 , pp. 617 - 628
Copyright
Copyright © Cambridge University Press 2010

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