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Elasticity of Factor Substitution and Capital Formation in a Two-Sector Economy

Mino, Kazuo (2011): Elasticity of Factor Substitution and Capital Formation in a Two-Sector Economy.

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Abstract

This paper explores the relationship between factor substitution in production and the steady-sate level of capital stock in a growing economy. Unlike the foregoing studies on this topic that have exclusively utilized one-sector growth models, we consider a two-sector economy where investment and consumption goods are produced by different technologies. We show that the relation between the elasticity of substation and the long-run capital formation critically depends on the factor-intensity ranking between the two sectors. Keywords: CES production function, two-sector model, capital accumulation, factorintensity ranking

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