Appropriate Technology and Balanced Growth

Miguel Leon-Ledesma and Mathan Satchi ()

Studies in Economics from School of Economics, University of Kent

Abstract: We provide a general theoretical characterization of how firm's technology choice on a technology frontier determines the long-run elasticity of substitution between capital and labor. We show that the shape of the frontier determines factor shares and the elasticity of substitution between capital and labor. If there are adjustment costs to technology choice, the short- and long-run elasticities differ, with the long-run always higher. If the technology frontier is log-linear, the production function becomes Cobb-Douglas in the long run but, consistent with empirical evidence, short-run dynamics are characterized by gross complementarity. The approach is easily implementable and yields a powerful way to introduce CES-type production functions in macroeconomic models. We provide an illustration within an estimated dynamic general equilibrium model and show that the use of our production technology provides a good match for the short- and medium-run behavior of the US labor share.

Keywords: Balanced growth; appropriate technology; elasticity of substitution (search for similar items in EconPapers)
JEL-codes: E25 O33 O40 (search for similar items in EconPapers)
Date: 2015-03, Revised 2016-11
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Citations: View citations in EconPapers (4)

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https://www.kent.ac.uk/economics/repec/1505.pdf First version, 2015 (application/pdf)
https://www.kent.ac.uk/economics/repec/1614.pdf Revised version, 2016 (application/pdf)

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Journal Article: Appropriate Technology and Balanced Growth (2019)
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