Economic Growth, Technical Change Biases, and the Elasticity of Substitution: A Test of the De La Grandville Hypothesis

Abstract

A recent development in microeconomic theory suggests that the size of the elasticity of substitution between factors is relevant to economic growth. This study undertakes an empirical investigation of this proposition, comparing two economies--the United States and South Korea. The authors' test results support the de la Grandville hypothesis that the elasticity of substitution is a potent explanatory variable of economic growth. This inquiry also provides a clue to the puzzle that the U.S. elasticity of substitution between labor and capital is well below unity whereas that of South Korea is close to unity; nonetheless, the U.S. Factor shares have tended to remain fairly stable whereas the distributive shares of South Korea seem to have changed in favor of capital. Their findings indicate that a high elasticity of substitution is a bad signal for the distribution of income under the paradigm of modern technology. Copyright 1991 by MIT Press.