Factor Substitution, Income Distribution, and Growth in a Generalized Neoclassical Model

23 Pages Posted: 3 Dec 2007

See all articles by Andreas Irmen

Andreas Irmen

University of Luxembourg - Ceter for Research in Economic Analysis (CREA); CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Munich

Rainer Klump

University of Frankfurt - Economics and Business Administration Area

Date Written: November 2007

Abstract

We analyze a generalized neoclassical growth model that combines a normalized CES production function and possible asymmetries of savings out of factor incomes. This generalized model helps to shed new light on a recent debate concerning the impact of factor substitution and income distribution on economic growth. We can show that this impact relies on both an efficiency and an acceleration effect, where the latter is caused by the distributional consequences of an increase in the elasticity of substitution. While the efficiency effect is always positive, the direction of the acceleration effect depends on the particular savings hypothesis. However, if savings out of capital income are substantial so that a certain threshold value is surpassed we find that the efficiency effect dominates and higher factor substitution can work as a major engine of growth.

Keywords: capital accumulation, elasticity of substitution, income distribution, neoclassical growth model

JEL Classification: E21, O11, O41

Suggested Citation

Irmen, Andreas and Klump, Rainer, Factor Substitution, Income Distribution, and Growth in a Generalized Neoclassical Model (November 2007). CESifo Working Paper No. 2148. Available at SSRN: https://ssrn.com/abstract=1046561

Andreas Irmen (Contact Author)

University of Luxembourg - Ceter for Research in Economic Analysis (CREA) ( email )

162a, avenue de la Faïencerie
Luxembourg, L – 1511
Luxembourg

HOME PAGE: http://wwwen.uni.lu/recherche/fdef/crea/people/andreas_irmen

CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Munich

Poschinger Str. 5
Munich, DE-81679
Germany

Rainer Klump

University of Frankfurt - Economics and Business Administration Area ( email )

Schumannstrasse 60
D-60325 Frankfurt am Main
Germany
+49 69 798-22288 (Phone)
+49 69 798-28121 (Fax)

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