As pointed out by Correia, Neves, and Rebelo (1995), the ability of this class of models to mimic key international indicators of a small open economy depends crucially on adopting the period utility function, postulated by Greenwood, Hercowitz, and Huffman (GHH) (1988), whereby there is no income effect associated with the household's labor supply decision and the representative household's intertemporal elasticity of substitution in hours worked (or leisure) is zero.
It could arise if caring for children is a "luxury good; if more educated parents have a lower elasticity of substitution between own and market-based child care (or just a higher relative preference for time spent with their children), or if the returns to investing in the children of more educated parents are relatively higher.
Factor demand comes from a very general specification of the production function and from weak assumptions, mainly the local approximation of the production function using a constant elasticity of substitution (CES) and constant returns to scale.
The growth facts do not tie down the elasticity of substitution between consumption and leisure, and this parameter turned out to be key for deriving the predictions of the growth model for business cycle fluctuations.
[sigma]] (3) where the [pi]s are the shares of the labour force in age groups denoted by i and j, the [alpha]s are the productivity weights and o is the elasticity of substitution (ES) (8) between labour inputs i and j.
He estimated a constant elasticity of substitution (CES) production function with data from the 1950s and 1960s and concluded that the elasticity of substitution between labour and capital was 0.
In a 2-country, 3-sector model, Bretschger (2001) challenges a main result of the existing literature on the impact of migration on growth, namely the positive effects of unskilled migration given an elasticity of substitution between skilled/unskilled greater than 1 (Grossman and Helpman, 1991).
Three levels were considered, with the first being moderate responsiveness, where 50 percent of the customers are price responsive and display an average hourly elasticity of substitution (HES) of 0.
