The joint dynamics of the saving rate and factor income shares

We assess the empirical plausibility of the economic conditions underlying the well-known result on the non-monotonic dynamics of the saving rate in the exogenous growth model with aggregate CES production function. It is well known that a hump-shaped saving rate can emerge along the transition dynamics when capital and labor are complementary. We show that under this condition, the marginal productivity of capital, which drives the substitution effect of capital accumulation, declines faster than the average productivity, which drives the income effect. We also show that some key features of the model are empirically implausible. In particular, the data do not support the declining path of the capital income share that the model shows in reproducing the hump-shaped saving rate.