Comment on “Labor- and Capital-augmenting technical change”: Does the stability of balanced growth path depend on the elasticity of factor substitution?

Bental, Benjamin and Li, Defu and Tang, Xuemei (2022): Comment on “Labor- and Capital-augmenting technical change”: Does the stability of balanced growth path depend on the elasticity of factor substitution?

Abstract

In a classic paper, Acemoglu (2003) developed a growth model where firms can undertake both labor- and capital-augmenting technological improvements. According to that paper the balanced growth path with purely labor-augmenting technical change is the unique asymptotic (noncycling) equilibrium, and is stable only when capital and labor are gross complements, i.e., only when the elasticity of substitution between these two factors is no greater than 1. Otherwise, the model not only has two other asymptotic steady-state paths, but also the balanced growth path is unstable. The current comment points out that Acemoglu's conclusion ignores the crowding effect in innovation sector that he has proposed due to the assumption of perfect mobility of scientists between sectors. By replacing the perfect mobility assumption with a smooth adjustment process, implicitly invoking the presence of some adjustment costs, this comment not only points out that the factors affecting the direction of technological progress include both the demand side of innovations (relative price and relative market size) and the supply side of innovations (relative marginal productivity of innovation), but also proves that regardless of whether the substitution elasticity is greater than 1 or less than 1, the balanced growth path is not only unique, but also at least locally saddle-path stable.

• Item Type: MPRA Paper
• Language: English
• Keywords: elasticity of substitution, crowding effect of innovation, scientist migration function, balanced growth path, direction of technological progress
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E25 - Aggregate Factor Income Distribution; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O14 - Industrialization ; Manufacturing and Service Industries ; Choice of Technology; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O33 - Technological Change: Choices and Consequences ; Diffusion Processes

References

Acemoglu, Daron, 2002, “Directed Technical Change”, Review of Economic Studies 69, pp. 781–809.

Acemoglu, Daron, 2003, “Labor- and Capital-Augmenting Technical Change”, Journal of European Economic Association, Vol.1 (1), pp. 1-37.

Hicks, John, 1932, The Theory of Wages, London: Macmillan.

Karabarbounis, Loukas, and Brent Neiman. 2014, “The Global Decline of the Labor Share.” Quarterly Journal of Economics 129 (1): 61–103.