Factor Substitutability and Convergence Speed: Which Approach to Use?

In this study, we derive results for the effect that the elasticity of factor substitution has on convergence speed, using a Constant-Elasticity-of-Substitution (CES) technology. We consider both the Solow and Ramsey-Cass-Koopmans growth models. Two approaches are available for our task. First, a normalization-based approach, championed by Klump & de La Grandville (2000), has been used to tackle the factor-substitutability/convergence-speed nexus. Second, within the Solow model, Ozkaya (2022a) challenged all of Klump & de La Grandville’s results, avoiding normalization of the production function while sticking to his explicit solution for the CES integration constants. Our study demonstrates that differences between the two approaches also concern the results for convergence speed, which Ozkaya did not investigate. Future research may shed light on which of the two approaches is deemed better for the analysis of economic growth in an environment of evolving factor substitutability.