Dynamic externalities, multiple equilibria, and growth

doi:10.1016/0022-0531(92)90053-K

Journal of Economic Theory

Volume 58, Issue 2, December 1992, Pages 198-218

https://doi.org/10.1016/0022-0531(92)90053-K Get rights and content

Abstract

I consider an OLG model with production and a single commodity. I show that in such an environment unbounded growth of income per capita is not possible if the aggregate technology is of the constant returns to scale type. I introduce an external effect in the aggregate production function and derive conditions under which persistent growth is an equilibrium outcome. The introduction of an external effect also creates “poverty traps” and open sets of initial conditions for which there exists an infinite multiplicity of equilibria. When such a multiplicity exists, equilibria with the same initial position will display different asymptotic behaviors. Finally, I show that by introducing appropriate tax schemes a unique equilibrium path can be selected.

References (12)

O Galor et al.
Existence, uniqueness, and stability of equilibrium in an overlapping generations model with productive capital
J. Econ. Theory
(1989)
R.E Lucas
On the mechanics of economic development
J. Monet. Econom.
(1988)
C Azariadis et al.
Threshold externalities in economic development
Quart. J. Econ.
(1990)
A.V Banerjee et al.
Occupational Choice and the Process of Development
(August 1991)
J Benhabib et al.
Social Conflict, Growth and Income Distribution
M Boldrin
Threshold Externalities and Economic Development: A Note

There are more references available in the full text version of this article.

Cited by (62)

Political corruption and legislative complexity: Two sides of same coin?
2021, Structural Change and Economic Dynamics
This paper investigates the macroeconomic impact of legislative complexity in relation to political corruption on growth rate, welfare level and income distribution. After reviewing economic literature on corruption and legislative complexity, an endogenous model is provided. The main theoretical findings of the analysis are that a high level of legislative complexity, like political corruption, constitutes a constraint to growth, reduces the welfare and determines a redistribution of income in favor of the politicians.
Wealth-sensitive positional competition as a source of dynamic complexity in OLG models
2013, Nonlinear Analysis: Real World Applications
This paper examines the interactions between economic activity and consumption externalities in an overlapping generations model. Existence of multiple steady states is studied from a global point of view, and possible mechanisms producing cycles and chaotic behavior are analyzed. Wealth-sensitive positionality is found to be able to generate persistent endogenous fluctuations, whereas wealth-neutral positionality doesn’t. Under wealth-sensitive positionality, the economy may moreover experience complex dynamics, with sensitivity to initial conditions, leading to poverty traps even when starting from relatively large endowments of capital assets.
Existence and uniqueness of steady-state equilibrium in a two-sector overlapping generations model
2008, Journal of Economic Theory
In his seminal paper Galor [A two-sector overlapping generations-model: a global characterization of the dynamical system, Econometrica 60 (1992) 1351–1386] establishes conditions for the existence of equilibrium in the two-sector overlapping generations (OLG) model. Although appealing theoretically, these conditions are implicit and not easy to apply. This paper develops new theorems on the existence and uniqueness of steady-state equilibrium in the two-sector OLG model. We provide explicit conditions on the utility and production functions for the existence and uniqueness of equilibrium, with which one only needs to check the derivatives of the production and utility functions and their interactions, without requiring solving for the savings function and its derivatives. We present detailed steps to check the existence and uniqueness of equilibrium and provide illustrative examples.
Occupational choice and dynamic indeterminacy
2005, Review of Economic Dynamics
This paper constructs a two-sector model of two-period lived overlapping generations with endogenous occupational choice in which ability-heterogeneous agents choose whether to become educated when young and skilled when old. We show that endogenous occupational choice in this two-sector framework can result in dynamic indeterminacy without complicated preferences/technologies and without requiring the consumption-good production to be more capital-intensive.
Labor market institutions, international capital mobility, and the persistence of underdevelopment
2003, Review of Economic Dynamics
We show that the impact of globalization on growth and wages crucially depends on the labor market structures of the countries involved. We contrast bargaining and perfect competition. Under perfect capital markets, convergence of capital and income per capita always occurs despite different labor market structures. However, different labor market structures prevent convergence of the income shares, with unionized countries showing a lower wage rate and consequent capital inflows. Therefore unionization, not globalization, is the cause of discrepancies in the within-country income-distribution patterns. Openness is always preferable to autarky for a small developing economy, independently of its labor market structure.
Income taxes, spending composition and long-run growth
2003, European Economic Review
The focus of this paper is threefold. First, it reexamines the impact on long-run growth of changes in flat-rate income taxes when a fraction of total government expenditures is used to provide public services that affect the productivity of privately held inputs. Second, for a given tax policy, this paper studies the impact of government expenditure composition on the rate of economic growth. Third, since demographics follow an overlapping generations structure and fiscal policy affects the economy's productivity, the paper features the role of productivity as a means of redistributing income across generations. The economy is analyzed numerically and policy experiments are carried out.

View all citing articles on Scopus

^∗: I thank the Santa Fe Institute in Santa Fe, New Mexico and the Institut d' Analisi Economica at the Universitat Autonoma de Barcelona for their kind hospitality and financial support. I am grateful to Tim Kehoe, Kiminori Matsuyama, José Scheinkman, Michael Woodford, an anonymous referee and an associate editor of this journal and seminar participants at the 1990 Northwestern Summer Conference, the Theoretical Division at Los Alamos National Laboratory, UCLA, Università Bocconi, Universitat Autonoma de Barcelona, The University of Chicago, University of Wisconsin-Madison, Keio University, Kyoto University, Università di Firenze and the Université de Montreal, for useful comments and suggestions.

View full text

I. Saving behaviorDynamic externalities, multiple equilibria, and growth

Abstract

J. Econ. Theory

J. Monet. Econom.

Threshold externalities in economic development

Quart. J. Econ.

Occupational Choice and the Process of Development

Social Conflict, Growth and Income Distribution

Threshold Externalities and Economic Development: A Note

I. Saving behavior
Dynamic externalities, multiple equilibria, and growth