Low Elasticity Of Substitution Research Articles

Complementarity in contests

To facilitate the study of contests in general equilibrium, we examine winner-take-all contests in which the prize is complementary to the effort of the contestants, as inputs are in production functions or final goods in utility functions. We focus on the effects of technological factors and endowments on the effort and the welfare of the contestants. Most of our findings differ considerably from the standard model of contests in which prize and effort are independent. In particular, we find a critical role for the elasticity of substitution between prize and effort. For example, under low elasticities of substitution, a higher prize reduces the effort exerted by the contestants.

Human capital formation and business cycle persistence

In this paper we examine the role of the formation of human capital in propagating shocks over the business cycle. We show that a two-sector equilibrium business cycle model with human capital is able to generate persistence in the growth of output and other aggregate variables comparable to that observed in the post-war US data. A key feature is the relatively low elasticity of substitution between skilled and unskilled labor in the production of human capital.

Trade and Endogenous Growth with Ricardo‐Viner Production Technology*

This paper derives three main results. First, learning by doing is sufficient to generate endogenous growth under Ricardo‐ Viner production technology. One implication of this result is that policy has a role when agents do not intermalize the dynamic gains from learning. Second, trade is advantageous for a small country and in the case of domestic goods having low elasticity of substitution in final consumption, high human capital content and/or a high learning rate. Third, border distortions in the form of import tariffs can affect pattern of specialization and long‐run growth but only for large economies and under very special circumstances.

The Optimal Linear Income Tax Model: Utility or Equivalent Income?

This paper compares the use of equivalent income with that of utility, in the social welfare function, in optimal income tax models. Equivalent income is a money metric welfare measure that, unlike utility, is not affected by monotonic transformations of utility. The use of equivalent income is found to produce an optimal tax rate that is more sensitive to the degree of inequality aversion, compared with the use of utility. With Cobb‐Douglas and CES utility functions, the optimal tax rate is the same for utility and equivalent income where relative inequality aversion is unity. When using equivalent incomes, the case for high marginal rates does not depend on the assumption of a very low elasticity of substitution between consumption and leisure.

Intra‐competition between the Asian Four Little Dragons in US Markets

Using an optimizing model of import demands, the degree of competition between the Four Little Dragons in the US market are examined. This paper finds that the exports by Hong Kong can be substituted by Taiwan, and vice versa. Hong Kong and Singapore have some degree of substitution, although Singapore tends to have low elasticities of substitution with Taiwan and South Korea. Moreover, the relatively low own‐price elasticities for Singapore and South Korea indicate their exporting goods are up‐scaled. This suggests that non‐price factors like product quality may be of importance in penetrating the US market.

The Soviet Economic Decline

Soviet growth from 1960 to 1989 was the worst in the world after we control for investment and human capital; the relative performance worsens over time. There is some evidence that the burden of defense spending modestly contributed to the Soviet debacle. The declining Soviet growth rate from 1950 to 1987 can be accounted for by a declining marginal product of capital with a constant rate of growth of total factor productivity. The Soviet reliance on extensive growth (rising capital-to-output ratios) was no greater than that of market economies, such as Japan and the Republic of Korea, but a low elasticity of substitution between capital and labor implied especially acute diminishing returns to capital compared with the case in market economies. Copyright 1995 by Oxford University Press.

A Green GNP Model and Sustainable Growth

While there is strong consensus at the conceptual level about sustainable development there are few formal models that outline the conditions for environmentally steady and sustainable growth in a decentralized market economy. Addresses this issue by building a Green GNP model and then deriving a single long‐run condition for environmentally steady and sustainable growth. Examines the relationship between industrial affluence and environmental decay. If industrial affluence comes from the lower elasticity of substitution among goods, it does not necessarily cause environmental decay. Finding that substitutability still plays an important role in environmentally steady and sustainable growth and concludes that public policy makers should pay more attention to the relationship between substitutability among goods and environmental sustainability.

Industrial growth in Czechoslovakia 1971–1985: Total factor productivity and capital-labor substitution

A CES production function with a low elasticity of substitution and a steady rate of growth of total factor productivity emerges as the dominant model to explain the output growth retardation in Czechoslovak industry when official data are used. The main cause of the output growth retardation is the sharp decrease in the marginal productivity of capital, accelerated somewhat by the decreasing rate of growth of inputs. The rate of growth of total factor productivity is the main growth factor in Czechoslovak industry.

Market Adjustment and Investment Determination under Rational Expectations

This paper extends traditional comparative statics analysis by providing a theory for the adjustment between stationary states for a competitive industry that faces upward sloping supply curves for durable and nondurable inputs given rational expectations. It is shown that capital adjustment is e specially slow for an industry with long-lived capital, an inelastic supply of investment goods, and a low elasticity of substitution between durable and nondurable inputs. A numerical analysis reveals that it takes 6.4 to 50.5 years to close half of the gap between actual and stationary state capital for depreciation rates of 0.01 to 0.05. Copyright 1986 by The Review of Economic Studies Limited.

Endogenous cycles with uncertain lifespans in continuous time

Endogenous equilibrium business cycles are found in a Blanchard (1985) model modified to include endogenous labor supply. With low elasticities of substitution in production and consumption, cycles arise around stationary states with positive real interest rates.

Elasticities of substitution in industry: What do we learn from econometric estimates?

If elasticities of substitution differ systematically among industries, different sets of econometric estimates should reveal this by yielding similar industry rankings. Ranking experiments are carried out for 12 sets of US, and four sets of developing country, two digit level estimates. In general, industry rankings differ significantly from study to study, and it is not possible to identify industries with either high or low elasticities of substitution. This may indicate that substitution elasticities vary significantly at different times and places, that variation of elasticities within two digit industries is great enough to obscure differences between industries, or that theoretical and data problems make current estimates unreliable.

The relative importance of campaign expenditures: An application of production theory

In an election campaign a politician attempts to combine the resources at his disposal so as to maximize the percent of the votes he receives. This behavior is consistent with an economic model of production where the producer combines inputs in order to maximize output. In this paper the concept of an election campaign as a production process is applied to elections to the U.S. House of Representatives. The three inputs were campaign expenditures, years of tenure in office, and the percent of registered voters in candidate's party. Cobb-Douglas and CES versions of the production function are estimated. Each estimation indicated that the marginal productivity of campaign expenditures was very low. Further, the CES estimation indicated low elasticity of substitution between campaign expenditures and other inputs. This means that it is difficult for a candidate who faces a disadvantage—either because his opponent is an incumbent with several years experience, or because he belongs to a minority party—to overcome this disadvantage by simply spending more money.