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Two‐level CES Production Technology in the Solow and Diamond Growth Models *
Author(s) -
Papageorgiou Chris,
Saam Marianne
Publication year - 2008
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.1467-9442.2008.00529.x
Subject(s) - elasticity of substitution , economics , constant elasticity of substitution , production function , complementarity (molecular biology) , production (economics) , steady state (chemistry) , substitution (logic) , growth model , factor shares , capital (architecture) , econometrics , microeconomics , history , chemistry , archaeology , biology , computer science , programming language , genetics
The two‐level CES aggregate production function—that nests a CES into another CES function—has recently been used extensively in theoretical and empirical applications of macroeconomics. We examine the theoretical properties of this production technology and establish existence and stability conditions of steady states under the Solow and Diamond growth models. It is shown that in the Solow model the sufficient condition for a steady state is fulfilled for a wide range of substitution parameter values. This is in sharp contrast with the two‐factor Solow model, where only an elasticity of substitution equal to one is sufficient to guarantee the existence of a steady state. In the Diamond model, multiple equilibria can occur when the aggregate elasticity of substitution is lower than the capital share. Moreover, it is shown that for high initial levels of capital and factor substitutability, the effect of a further increase in a substitution parameter on the steady state depends on capital–skill complementarity.