Elasticity of substitution and growth: normalized CES in the diamond model (Q1865170)

This paper deals with modern growth theory. It is often asserted that the more substitutable capital and labor are in the aggregate production the more rapidly as economy grows. This paper demonstrates that there exists no such monotonic relationship between factor substitutability and growth in the Diamond overlapping-generations model. In particular, the authors prove that, if capital and labor are relatively substitutable, a country with a greater elasticity of substitution exhibits lower per capita output growth in transit and in steady state.