Technology Differences Over Space and Time by Caselli Francesco

Author:Caselli, Francesco
Language: eng
Format: epub, pdf
Publisher: Princeton University Press

4.4 Imperfect Substitution between Reproducible and Natural Capital

I now turn to the surprising result that richer countries use capital less efficiently than poorer ones. In the benchmark calculation I simply measured by the World Bank’s aggregate of natural and reproducible capital. If these two components of the capital stock are imperfect susbstitutes, this is a potentially biased measure, particularly in light of the vast cross-country variation in the composition of the aggregate capital stock documented in chapter 3. In this section I look at how my headline result varies for alternative values of the elasticity of substitution 1/(1 − η).

Plugging (3.4) into (3.1) we can rewrite the capital stock in units of natural capital as

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