Elasticity of Substitution in Economic Growth Models

The elasticity of substitution measures the ease with which firms can switch between labour and capital in the production process and is central to understanding long-run growth trajectories, income distribution and the response of economies to technological, demographic or environmental shocks. Embedded within production functions – from Cobb-Douglas to more flexible Constant Elasticity of Substitution (CES) formulations – this parameter determines returns to scale, factor bias and the potential for poverty traps, cycles or smooth convergence. In classical neoclassical models, a unit elasticity underpins balanced growth, while deviations – whether gross complementarity or substitutability – drive divergence in factor shares, influence policy effectiveness and shape the global pattern of development. Recent theoretical advances have extended this concept through non-concave, sigmoidal or generalised logistic functions to capture rare events and multi-stability, reflecting fragile equilibria in emerging and developing economies. A clear grasp of elasticity of substitution thus informs macroeconomic policy, guides investment in human and physical capital, and illuminates the structural transformation needed for sustainable growth.

Research from Nature Portfolio

No recent Nature Portfolio content available.

Elasticity of Substitution in Economic Growth Models publication trend

The graph below shows the total number of articles in elasticity of substitution in economic growth models across all publications each year (not limited to Nature Index journals).

Technical terms

Elasticity of substitution: Measure of how easily one input (e.g. capital) can be substituted for another (e.g. labour) while maintaining output.

Constant Elasticity of Substitution (CES): A flexible production function family where inputs can be substituted at a constant rate determined by the elasticity parameter.

Cobb-Douglas production function: A special case of CES with unit elasticity, implying constant factor shares and balanced growth.

Sigmoidal production function: A non-linear formulation that captures S-shaped returns to input accumulation and potential multiple equilibria.

Factor shares: The proportion of output attributed to each input, influenced by the elasticity of substitution.

References

1. The κ -logistic growth model. Qualitative and quantitative dynamics. Mathematics and Computers in Simulation (2024).
2. Appropriate Technology and Balanced Growth. The Review of Economic Studies (2018).
3. Economic growth, poverty traps and cycles: productive capacities versus inefficiencies. Journal of Economic Studies (2022).
4. The influence of biased technical progress on employment scale of the circulation industry: Evidence from China. PLOS ONE (2024).