Factor Substitution, Income Distribution and Growth in a Generalized Neoclassical Model

Andreas Irmen and Klump Rainer
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Klump Rainer: University of Frankfurt,Frankfurt, Germany

German Economic Review, 2009, vol. 10, issue 4, 464-479

Abstract: We analyze a generalized neoclassical growth model that combines a normalized CES production function and possible asymmetries of savings out of factor incomes. This generalized model helps to shed new light on a recent debate concerning the impact of factor substitution and income distribution on economic growth. We show that this impact relies on both an efficiency and a distribution effect, where the latter is caused by the distributional consequences of an increase in the elasticity of substitution. While the efficiency effect is always positive, the sign of the distribution effect depends on the particular savings hypothesis. If the savings rate out of capital income is substantial so that a certain threshold value is surpassed, the efficiency effect dominates and higher factor substitution accelerates the accumulation of capital and works as a major engine of growth.

Keywords: Capital accumulation; elasticity of substitution; income distribution; neoclassical growth model (search for similar items in EconPapers)
Date: 2009
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Related works:
Journal Article: Factor Substitution, Income Distribution and Growth in a Generalized Neoclassical Model (2009)
Working Paper: Factor Substitution, Income Distribution, and Growth in a Generalized Neoclassical Model (2007)
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DOI: 10.1111/j.1468-0475.2009.00491.x

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