Sharmila Gamlath | Queensland University of Technology

We explore the properties of the variable elasticity of substitution production function, and look at the dynamics of growth it creates by incorporating it into an overlapping generations model à la Diamond (1965). We show that a certain technology parameter in this production function is a source of biased technical change and that it can also explain the movements in the share of labour in output that many countries have experienced in recent times.

Growth dynamics reveal that, depending on the values of this technology parameter, the economy could reach a unique and stable steady state, achieve unbounded growth, or fall into a poverty trap. Hence, the variable elasticity of substitution production function allows us to capture much of the observed diversity in international growth experiences observed in the extant growth literature.

We also show that the capital biased technical change created by a higher value of this parameter improves productivity in steady state, but causes an exacerbation of intergenerational inequality.

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