Capital-labor substitution and balanced growth

This paper explores how different values of the elasticity of substitution between capital and labor (sigma) impact on the balanced growth paths and growth potential of a country in exogenous growth models. The behavior of the system depends on the value of sigma and the passage of sigma through two critical values causes a qualitative change in the nature of the singular points and of its trajectories. The balanced growth path defined by a singular point in the form of a saddle-path exists and is locally stable if sigma lies between two critical values. (C) 2010 Elsevier Inc. All rights reserved.