Income and factor substitution : an investigation on the Solow growth model under the constant elasticity of substitution

Purpose: The purpose of this study is to examine whether the elasticity of substitution (ES) varies between developed and developing countries. Design/methodology/approach: The author derives the growth regressions from the Solow model under the constant elasticity of substitution production function by using the first-order Taylor series expansion and estimate them for each country group classified based on time-varying behavior of income per worker using the data-driven algorithm. Findings: The ES is not unitary and varies among country groups. Developed countries generally have a higher ES than developing countries. Originality/value: For the first time, the author uses the first-order Taylor series expansion to linearize the steady-state value of income per worker, as the author considers this approach to be relatively more straight-forward and tractable. Furthermore, the author estimates the equations using both cross-section and panel data techniques and employs the data-driven algorithm proposed by Phillips and Sul (2007) to classify countries.