Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions

Klump, Rainer; Grandville, Olivier de La

doi:10.1257/aer.90.1.282

Cited by 282 publications

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“…Furthermore, the standard errors of the estimates are quite low, implying that the null hypothesis of a unit elasticity is rejected at the 1% signi…cance level for …ve of the six speci…cations, while it is rejected at the 10% level for the remaining equation (see the t-stats in Table 5). Interestingly, the estimates are also consistent with the empirical regularity discussed in Berndt (1976), by which the estimates of 30 Notice also that the constant terms are not only a function of , but depend also on , A K 0 and A K 0 (see Klump and De La Grandville, 2000, for more on this). the elasticity based on the marginal product of labor equations tend to be higher than the estimates based on the marginal product of capital equations.…”

Section: Estimation Resultssupporting

confidence: 73%

Is the U.S. Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of Substitution

Antràs

2004

Contributions in Macroeconomics

298

287

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I present new estimates of the elasticity of substitution between capital and labor using data from the private sector of the U.S. economy for the period 1948-1998. I first adopt Berndt's (1976) specification, which assumes that technological change is Hicks neutral. Consistently with his results, I estimate elasticities of substitution that are not significantly different from one. I next show, however, that restricting the analysis to Hicks-neutral technological change necessarily biases the estimates of the elasticity towards one. When I modify the econometric specification to allow for biased technical change, I obtain significantly lower estimates of the elasticity of substitution. I conclude that the U.S. economy is not well described by a Cobb-Douglas aggregate production function. I present estimates based on both classical regression analysis and time series analysis. In the process, I deal with issues related to the nonsphericality of the disturbances, the endogeneity of the regressors, and the nonstationarity of the series involved in the estimation.

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Section: Estimation Resultssupporting

confidence: 73%

Is the U.S. Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of Substitution

Antràs

2004

Contributions in Macroeconomics

298

287

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“…Finally, it is also related to studies of the impact of the elasticity of substitution (between capital and labor) on growth; see e.g. Klump and de la Grandville (2000), Miyagiwa and Papageorgiou (2003).…”

Section: Introductionmentioning

confidence: 99%

Productive government spending and its consequences for the growth–inequality tradeoff

Getachew

Turnovsky

2015

Research in Economics

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This paper investigates the effects of productive government spending on the relationship between growth and inequality in an economy subject to idiosyncratic production shocks and heterogeneous endowments. Assuming lognormal distributions, we derive tractable closed form solutions describing the equilibrium dynamics. We show how the effect of government investment on the equilibrium dynamics of both inequality and growth depends crucially upon the elasticity of substitution between public and private capital in production. This has important consequences for the growth-and welfaremaximizing rates of government investment. Finally, we supplement our theoretical analysis with numerical simulations, calibrated to approximate the productive characteristics of a real world economy. With the empirical evidence strongly supporting the complementarity between public and private capital, our simulations suggest that conclusions based on the commonly employed Cobb-Douglas production function may be seriously misleading.Key words: Government investment; Idiosyncratic shocks; Growth; Inequality JEL Classification: D31, O41 Revised versionJune 2015*The paper has benefited from comments received on earlier versions from seminar participants at the University of Durham and the University of Pretoria. We also thank Santanu Chatterjee for useful suggestions. Research for this paper was carried out while Getachew was visiting the University of Washington in the Fall of 2013. Turnovsky"s research was supported in part by the Van Voorhis endowment at the University of Washington.**Corresponding author: sturn@u.washington.edu 1 IntroductionThe role of public investment in infrastructure as a source of economic growth continues to be widely debated in both developing and advanced economies, with different economies adopting different policy options. Several emerging-market countries including India, China, and Brazil have undertaken extensive public investment, to which their high growth rates of recent years may at least in part be attributed. In contrast, several European countries have reduced public spending, as they have pursued austerity measures intended to deal with concerns related to their rising debt levels.Contemporaneously with these diverse policies toward public investment, we have witnessed increasing income inequality, both in emerging markets and in most OECD countries. This raises the important question that we address in this paper, namely the relationship between public investment directed toward growth enhancement and its consequences for income inequality.Interest in the relationship between public investment, output, and growth has a long history, dating back to Arrow and Kurz (1970), who examined it in the context of a neoclassical economy.Beginning with Barro (1990), an extensive literature has evolved addressing the issue in an endogenous growth framework, with a general consensus that government spending on infrastructure can yield significant productivity gains and thus enhance growth. See e.g. F...

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“…Considering ∂γ t+1 /∂σ 2 t < 0, a higher inequality lowers growth. Moreover, a higher elasticity of substitution leads to a higher growth, as in Klump and de la Grandville (2000). Similar to the literature in public capital and growth (e.g., Barro 1990), public investment affects growth directly through its effect on the productivity of private capital.…”

Section: Growth Ratementioning

confidence: 52%

Distributional effects of public policy choices

Getachew

2012

Economics Letters

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The full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-pro t purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. AbstractThis paper examines the effects of a budget-neutral public spending allocation between public investment and private investment subsidy on inequality dynamics and intergenerational mobility in an environment with heterogenous households and incomplete capital market.

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Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions

Cited by 282 publications

References 4 publications

Is the U.S. Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of Substitution

Is the U.S. Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of Substitution

Productive government spending and its consequences for the growth–inequality tradeoff

Distributional effects of public policy choices

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