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Appropriate Technology and Balanced Growth

Leon-Ledesma, Miguel A., Satchi, Mathan (2019) Appropriate Technology and Balanced Growth. The Review of Economic Studies, 86 (2). pp. 807-835. ISSN 0034-6527. (doi:10.1093/restud/rdy002) (KAR id:62892)

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Abstract

We provide a general theoretical characterization of how firm's technology choice on a technology frontier determines the long-run elasticity of substitution between capital and labor. We show that the shape of the frontier determines factor shares and the elasticity of substitution between capital and labor. If there are adjustment costs to technology choice, the short- and long-run elasticities differ, with the long-run always higher. If the technology frontier is log-linear, the production function becomes Cobb-Douglas in the long run but, consistent with empirical evidence, short-run dynamics are characterized by gross complementarity. The approach is easily implementable and yields a powerful way to introduce CES-type production functions in macroeconomic models. We provide an illustration within an estimated dynamic general equilibrium model and show that the use of our production technology provides a good match for the short- and medium-run behavior of the US labor share.

Item Type: Article
DOI/Identification number: 10.1093/restud/rdy002
Uncontrolled keywords: Balanced growth, Appropriate technology, Elasticity of substitution
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculties > Social Sciences > School of Economics
Depositing User: Miguel Leon-Ledesma
Date Deposited: 21 Aug 2017 08:27 UTC
Last Modified: 06 May 2020 03:16 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/62892 (The current URI for this page, for reference purposes)
Leon-Ledesma, Miguel A.: https://orcid.org/0000-0002-3558-2990
Satchi, Mathan: https://orcid.org/0000-0001-8295-9626
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