Endogenous sigma-augmenting technological change: An R&D-based approach
Alexander Kemnitz () and
No 02/20, CEPIE Working Papers from Technische Universität Dresden, Center of Public and International Economics (CEPIE)
There is now increasing evidence that for the U.S. economy, the elasticity of substitution between capital and labor, "sigma", is rising over time. To account for this, we propose a microfounded model, where the evolution of "sigma", and, hence, the shape of the aggregate production function occur endogenously. We develop a Schumpeterian growth model in which firms can undertake R&D activities that stochastically lead to the discovery of production technologies characterized by a higher elasticity of substitution between capital and labor. Improved possibilities for factor substitution mitigate the diminishment of the marginal product of capital and spur capital accumulation. Due to successful innovations, the steady state of the economy entails higher levels of the capital stock and the output good. Moreover, our numerical simulations show that the timing of innovations is important: two economies with the same steady-state elasticity of substitution between capital and labor can differ in terms of their steady-state levels of the capital stock and the output good.
Keywords: Monopolistic competition; Endogenous elasticity of substitution; Functional normalization; Schumpeterian growth model (search for similar items in EconPapers)
JEL-codes: E24 J24 J31 O33 O41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-gro, nep-ino, nep-lma and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:zbw:tudcep:0220
Access Statistics for this paper
More papers in CEPIE Working Papers from Technische Universität Dresden, Center of Public and International Economics (CEPIE) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().