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PurposeThe purpose of this paper is to explore the properties of the variable elasticity of substitution (VES) production function, and examine the dynamics of growth associated with it.Design/methodology/approachThe VES production function is incorporated into an otherwise standard Diamond overlapping generations model.FindingsDepending on parameter combinations, the economy can achieve a unique and stable steady state akin to that observed in the Solow-Swan model, reach a poverty trap or transition towards an upper bound of per capita capital stock. A special case of the VES production function is also consistent with unbounded growth.Research limitations/implicationsThe paper is theoretical in nature. Further empirical analysis could shed deeper insights into the results presented in this study.Practical implicationsThe VES production function, when applied to the context of the Diamond model, can capture a variety of growth experiences observed in the empirical literature.Social implicationsIn the context of the Diamond model, a higher value of a particular parameter in the production function leads to greater intergenerational income and consumption inequality. Hence, the study provides a potential explanation for intergenerational inequalities observed in practice.Originality/valueThe study demonstrates the empirical value of the VES production function in explaining observed differences in factor shares, rewards and elasticities within and between countries over time.

We examine technology adoption and growth in a political economy framework where two alternative mechanisms of redistribution are on the menu of choice for the economy. One of these is a lump-sum transfer given to agents in the economy. The other is in the form of expenditure directed towards institutional reform aimed at bringing about a reduction in the cost of technology adoption in the presence of uncertainty. The choice over these mechanisms is examined under three alternative approaches to collective decision making. In the first setting, voting takes place to determine the proportion of revenue allocated to adoption-cost-reducing institutional expenditure. In the second setting, the government chooses this proportion to maximize a ‘Benthamite’ social welfare function, i.e. the sum of utilities of agents in the economy. The third setting applies the Rawlsian social welfare function, which is the most “egalitarian” in that this proportion is chosen to maximize the minimum level of utility attained in the heterogeneous agent economy. We find that the extent of uncertainty, working through the political economy mechanism, has a positive impact on long run average wealth levels in the economy in all settings. The voting mechanism leads to the fastest transition to sustained balanced growth in all cases, while the slowest transition is experienced in the case of the Rawlsian economy. Expenditures on institutional development are higher in the voting and Benthamite economies relative to the Rawlsian economy. All economies converge to the same inequality and growth rates in the long run. Transitional inequality, however, is highest in the Rawlsian framework.

We develop an overlapping generations model to explore how the degree of aggregate substitutability between public and parental education expenditures impacts long run macroeconomic outcomes. Using a variable elasticity of substitution “education production function,” in which public and education expenditures are the inputs, we observe that greater aggregate substitutability between these two types of expenditure yields better long run macroeconomic outcomes and that the proportion of tax revenue allocated towards public education is increasing in aggregate substitutability. Analysis of the stability of the steady state reveals that, depending on the values of the parameters of the model, the economy could reach a stable steady state or achieve unbounded growth. We suggest that policies aimed at improving aggregate substitutability between public and private education outcomes could contribute towards improved long run outcomes.