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Technical change, variable elasticity of substitution and economic growth

Sharmila Gamlath (Student Success Group, Learning and Teaching Unit, Queensland University of Technology, Queensland, Australia)
Radhika Lahiri (Queensland University of Technology Business School, Brisbane, Australia)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 8 October 2018

239

Abstract

Purpose

The purpose of this paper is to explore the properties of the variable elasticity of substitution (VES) production function, and examine the dynamics of growth associated with it.

Design/methodology/approach

The VES production function is incorporated into an otherwise standard Diamond overlapping generations model.

Findings

Depending on parameter combinations, the economy can achieve a unique and stable steady state akin to that observed in the Solow-Swan model, reach a poverty trap or transition towards an upper bound of per capita capital stock. A special case of the VES production function is also consistent with unbounded growth.

Research limitations/implications

The paper is theoretical in nature. Further empirical analysis could shed deeper insights into the results presented in this study.

Practical implications

The VES production function, when applied to the context of the Diamond model, can capture a variety of growth experiences observed in the empirical literature.

Social implications

In the context of the Diamond model, a higher value of a particular parameter in the production function leads to greater intergenerational income and consumption inequality. Hence, the study provides a potential explanation for intergenerational inequalities observed in practice.

Originality/value

The study demonstrates the empirical value of the VES production function in explaining observed differences in factor shares, rewards and elasticities within and between countries over time.

Keywords

Acknowledgements

This paper is based on a section of the corresponding author’s PhD thesis. A full version of the thesis can be accessed via: https://eprints.qut.edu.au/97976/1/Sharmila_Gamlath_Thesis.pdf

Citation

Gamlath, S. and Lahiri, R. (2018), "Technical change, variable elasticity of substitution and economic growth", Journal of Economic Studies, Vol. 45 No. 5, pp. 1054-1071. https://doi.org/10.1108/JES-07-2017-0180

Publisher

:

Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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