Variable Elasticity of Substitution in the Diamond Model: Dynamics and Comparisons

We study the dynamics shown by the discrete time Diamond overlapping generations model with the VES production function in the form given by Revankar[10] and compare our results with those obtained by Brianzoni et al.[2] in the Solow model. We prove that, as in Brianzoni et al.[2], unbounded endogenous growth can emerge if the elasticity of substitution is greater than one; moreover, differently from Brianzoni et al.[2], the Diamond model can admit two positive steady states. We also prove that complex dynamics occur if the elasticity of substitution between production factors is less than one, confirming the results obtained by Brianzoni et al.[2]. Numerical simulations support the analysis.