Economic growth and factor substitution with elastic labor supply

We study the link between the elasticity of factor substitution and economic growth in the Ramsey-Cass-Koopmans model with elastic labor supply and normalized CES production. If the baseline value of capital per unit of effective labor is below its steady-state value, an increase in the elasticity of substitution generates a higher steady-state income, capital and consumption per capita. This is due to the combination of a positive efficiency effect of a higher elasticity of substitution and a positive distribution effect. However, the effect of a higher elasticity of substitution on these variables along the transition is ambiguous. (C) 2018 Elsevier B.V. All rights reserved.