Elasticity of substitution, long‐run growth, and convergence speed: A general framework

Abstract

AbstractThis paper studies the effect of factor substitution on long‐run growth and the convergence speed in the one‐sector endogenous‐growth model. We consider a general production function that encompasses the most commonly used specifications as particular cases. For two economies with the same initial conditions and parameter values, including the baseline elasticity of substitution (EOS), the one with the higher asymptotic EOS has the higher long‐run growth and convergence speed. If the asymptotic EOS is a nondecreasing function of its baseline value, an increase in the baseline EOS entails a higher long‐run growth and convergence speed.