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Appropriate Technology and Balanced Growth

Leon-Ledesma, Miguel A., Satchi, Mathan (2018) Appropriate Technology and Balanced Growth. Review of Economic Studies, 86 (2). pp. 807-835. ISSN 0034-6527. E-ISSN 1467-937X. (KAR id:78619)

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We provide a general theoretical characterization of how firms' 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
Uncontrolled keywords: JEL Classification: E25, O33, O40. Balanced growth, appropriate technology, elasticity of substitution.
Subjects: H Social Sciences
Divisions: Faculties > Social Sciences > School of Economics
Depositing User: Mathan Satchithananthan
Date Deposited: 12 Nov 2019 18:32 UTC
Last Modified: 06 May 2020 03:20 UTC
Resource URI: (The current URI for this page, for reference purposes)
Leon-Ledesma, Miguel A.:
Satchi, Mathan:

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