Income and factor substitution: an investigation on the Solow growth model under the constant elasticity of substitution

Sedat Alatas

Journal of Economic Studies, 2021, vol. 49, issue 3, 397-421

Abstract: Purpose - The purpose of this study is to examine whether the elasticity of substitution (ES) varies between developed and developing countries. Design/methodology/approach - The author derives the growth regressions from the Solow model under the constant elasticity of substitution production function by using the first-order Taylor series expansion and estimate them for each country group classified based on time-varying behavior of income per worker using the data-driven algorithm. Findings - The ES is not unitary and varies among country groups. Developed countries generally have a higher ES than developing countries. Originality/value - For the first time, the author uses the first-order Taylor series expansion to linearize the steady-state value of income per worker, as the author considers this approach to be relatively more straight-forward and tractable. Furthermore, the author estimates the equations using both cross-section and panel data techniques and employs the data-driven algorithm proposed by Phillips and Sul (2007) to classify countries.

Keywords: Solow growth model; Production functions; Elasticity of substitution; Cross-section data; Panel data; 047; 050; C21; C23; E13 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-07-2020-0335

DOI: 10.1108/JES-07-2020-0335

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