Income and wealth distribution in a simple model of growth

Summary. This paper studies a deterministic one-sector growth model with a constant returns to scale production function and endogenous labor supply. It is shown that the distribution of capital among the agents has an effect on the level of per-capita output. There exists a continuum of stationary equilibria with different levels of per-capita output. If the elasticity of intertemporal substitution is large, a higher output level can be achieved when income inequality is great, that is, when the income distribution is strongly dispersed. If the elasticity of intertemporal substitution is low, the reverse relation holds. The paper shows that countries with identical production technologies and identical preferences may have different GDP levels because wealth is distributed differently among their inhabitants. Received: January 29, 1999; revised version: October 4, 1999     

Capital–labor substitution and balanced growth

This paper explores how different values of the elasticity of substitution between capital and labor (σ) impact on the balanced growth paths and growth potential of a country in exogenous growth models. The behavior of the system depends on the value of σ and the passage of σ through two critical values causes a qualitative change in the nature of the singular points and of its trajectories. The balanced growth path defined by a singular point in the form of a saddle-path exists and is locally stable if σ lies between two critical values.     

Comment on “σ: The long and short of it”

I comment on some of the issues discussed by Robert Chirinko (Chirinko, R.S., 2008. σ: The long and short of it. Journal of Macroeconomics 30 (2), 671-686). I also offer some additional evidence and discuss the theoretical implications of the empirical findings regarding σ.     

Overconfidence and consumption over the life cycle

Overconfidence is a widely documented phenomenon. In this paper, we study the implications of consumer overconfidence in a life-cycle consumption/saving model. Our main analytical result is a necessary and sufficient condition under which any degree of overconfidence concerning the mean return on savings can produce a hump in the work-life consumption profile. This condition is almost always met in the data. We show by simulations that overconfidence concerning the variance of the return can have little effect on the long-run average behavior of consumption over the life cycle, and that our basic conclusion is fairly robust with various realistic modifications to the baseline model. We interpret the general applicability of our analytical framework and discuss our numerical results in the light of aggregate consumption data.     

Is food consumption a good proxy for nondurable consumption?

This paper examines whether there is a discrepancy in estimating the elasticity of intertemporal substitution using food consumption instead of nondurable consumption data. We show that a discrepancy exists and that the discrepancy increases as nondurable consumption increases.     

Comment on “The endogenous aggregate elasticity of substitution for a small open economy”

This note applies the approach of Miyagiwa and Papageorgiou [Miyagiwa, K. and Papageorgiou, C., 2007. Endogenous aggregate elasticity of substitution. Journal of Economic Dynamics and Control 31, 2899–2919] to provide simple frameworks for endogenizing the aggregate elasticity of substitution between capital and labor for a growing small open economy.     

Growth and social security: the role of human capital

This paper studies the growth and efficiency effects of pay-as-you-go financed social security when human capital is the engine of growth. Employing a variant of the Lucas model [Lucas, R.E., 1988. On the mechanics of economic development. Journal of Monetary Economics 22, 3–42.] with overlapping generations, it is shown that a properly designed, unfunded social security system leads to higher output growth than a fully funded one. Furthermore, the economy with an unfunded social security is efficient, while the other one is not. These results stand in sharp contrast to those obtained in models where the reason for economic growth is physical capital accumulation.     

The role of factor substitution in the theory of economic growth and income distribution: Two examples

While much empirical evidence suggests that the Cobb–Douglas production function may be a reasonable benchmark for aggregate analysis, we argue that the practice, particularly prevalent in contemporary growth theory, of adopting the Cobb–Douglas technology, may lead to misleading implications. Using two examples, we show that key implications of the models are highly sensitive to small deviations of the elasticity of substitution from unity. The first employs the standard neoclassical model and emphasizes the sensitivity of the speed of convergence to small changes in the elasticity of substitution. This in turn has profound consequences for wealth and income distribution. The second deals with foreign aid and highlights how the relative merits of “tied” versus “untied” aid are also very sensitive to the elasticity of substitution.     

Factor substitution and labor market friction in the United States: 1948–2010

We re-estimate the capital-labor elasticity of substitution and the biased factor-augmenting technological progress using a system approach for the aggregate U.S. economy from 1948 to 2010. Due to (i) the significant impacts of labor market dynamics on economic growth and (ii) the fundamental tension between the short-run data that are available and the long-run parameter that is required in the estimation process, we incorporate labor market friction into a supply-side system to re-estimate these important growth parameters and to explore their sensitivity to the incorporation of labor market friction. Our estimation obtains a significantly smaller-than-unity elasticity of substitution. This result is consistent with labor input measured along the extensive and intensive margin, and in both competitive and imperfect labor markets. Technological progress tends to be purely labor-augmenting, with the average growth rate around 2% per year. These findings are robust to alternatively constructed data sets and different estimation strategies.     

人力资本分层与劳动供给的跨期替代

通过人力资本分层的视角来研究劳动供给的跨期替代.我们发现低收入阶层劳动力由于受到信贷约束以及生活、教育、医疗等基本保障的约束,不能在实际中进行劳动供给的跨期替代,中高收入阶层具备了进行劳动供给跨期替代的条件,但由于传统文化习俗、工作合约和潜在失业威胁的存在,一般也不会轻易进行劳动供给的跨期替代.     

Comment on “Unwrapping some euro area growth puzzles: Factor substitution, productivity and unemployment”

This paper estimates the factor elasticity of substitution of the aggregate production function and then uses these estimates to resolve two puzzles relating to the Euro Area. The paper is novel in three ways: First it uses the CES production technology in the empirical strategy to understand real world economic phenomena; second it uses a frontier empirical methodology; and third it uses a new dataset.     

Capital theory and the origins of the elasticity of substitution (1932-35)

Elasticity of substitution was introduced into economics duringthe early 1930s. It was discovered independently by Hicks inThe Theory of Wages and by Joan Robinson in The Economics ofImperfect Competition, and then was the centre of a polemicinvolving Kahn and Sraffa, among others. The debate focusedon imperfect competition and capital-theoretical issues. Someelements of the 1950s and 1960s capital theory controversy,such as the idea of capital as a Giffen good or the difficultiesof measuring capital, were already discussed at this early stage.