Substitutability between production factors and growth. An analysis using VES production functions

Francesca Grassetti, Cristiana Mammana and Elisabetta Michetti

Chaos, Solitons & Fractals, 2018, vol. 113, issue C, 53-62

Abstract: This work investigates the economic growth problem of establishing a relation between the elasticity of substitution between production factors, capital and output per-capita levels when dealing with a non constant elasticity of substitution production function. Starting from a discrete-time setup, some definitions of elasticity of substitution associated to an attractor are proposed and a general method to measure it is suggested. Thanks to this methodology a government may select a proper economic policy in order to reduce production costs without decreasing the capitalisation trend of the economy. The method proposed is applied to the Solow’s type growth model with differential savings using a Variable Elasticity of Substitution (VES) production function with constant returns to scale. It is found that when shareholders save more than workers or the elasticity of substitution is higher than one, a country characterised by production functions with higher elasticity of substitution experiences higher capital and output per-capita equilibrium levels. On the other hand, when the elasticity of substitution is lower than one and workers save more than shareholders, an ambiguous relation between elasticity of substitution and asymptotic dynamics is shown.

Keywords: Economic growth; Elasticity of substitution; VES; Solow model; Economic dynamics (search for similar items in EconPapers)
JEL-codes: C02 C61 E23 O41 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:chsofr:v:113:y:2018:i:c:p:53-62

DOI: 10.1016/j.chaos.2018.04.012

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