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Indeterminacy and the elasticity of substitution in one-sector models

Tsz-Nga Wong () and Chong Yip

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 4, 623-635

Abstract: This paper introduces a new production externality via factor substitution and explores its effects on generating indeterminacy in one-sector growth models. With the elasticity of substitution depends on the average level of capital intensity, indeterminacy is possible as long as the steady-state level of capital is below the normalized level of the CES production function. Given that the elasticity of factor substitution is decreasing in capital and the marginal product of capital is decreasing in terms of the elasticity, indeterminacy can occur because efficient factor substitution from capital deepening offsets the diminishing returns of capital.

Keywords: Elasticity; of; substitution; Indeterminacy; Normalized; CES; production; function (search for similar items in EconPapers)
Date: 2010
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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