Income and factor substitution: an investigation on the Solow growth model under the constant elasticity of substitution
ISSN: 0144-3585
Article publication date: 12 March 2021
Issue publication date: 29 March 2022
Abstract
Purpose
The purpose of this study is to examine whether the elasticity of substitution (ES) varies between developed and developing countries.
Design/methodology/approach
The author derives the growth regressions from the Solow model under the constant elasticity of substitution production function by using the first-order Taylor series expansion and estimate them for each country group classified based on time-varying behavior of income per worker using the data-driven algorithm.
Findings
The ES is not unitary and varies among country groups. Developed countries generally have a higher ES than developing countries.
Originality/value
For the first time, the author uses the first-order Taylor series expansion to linearize the steady-state value of income per worker, as the author considers this approach to be relatively more straight-forward and tractable. Furthermore, the author estimates the equations using both cross-section and panel data techniques and employs the data-driven algorithm proposed by Phillips and Sul (2007) to classify countries.
Keywords
Acknowledgements
The author would like to thank the anonymous referees and editor for supporting in improving the earlier draft of this paper. Besides, this paper draws heavily from the corresponding author's PhD dissertation written at Aydın Adnan Menderes University under the supervision of Necmiye Cömertler and Hakan Yetkiner. The author wishes to thank them for their valuable and constructive comments and suggestions.In the interest of transparency, data sharing and reproducibility, the author(s) of this article have made the data underlying their research openly available. It can be accessed by following the link here: http://dx.doi.org/10.17632/bwckvktwdh.6
Citation
Alatas, S. (2022), "Income and factor substitution: an investigation on the Solow growth model under the constant elasticity of substitution", Journal of Economic Studies, Vol. 49 No. 3, pp. 397-421. https://doi.org/10.1108/JES-07-2020-0335
Publisher
:Emerald Publishing Limited
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