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Finite lifetimes and growth

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  • Jones, Larry E.
  • Manuelli, Rodolfo E.

Abstract

The recent literature an endogenous growth models has emphasized the effect that the rate of return has an the capital accumulation decisions and, consequently, on the growth rate of the economy. In most cases the basic model is a variant of the representative agent growth model. The key feature of the infinitely lived agent model is that "substitution effects" dominate, that is, in order to induce individuals to accumulate capital all that is required is a sufficiently high rate of return. In this paper we explore the long run behavior in a model with finite lifetimes -- a version of Diamond's overlapping generations model. Because individuals do not live forever (although the economy does) their level of income as well as the rate of return determine the rate of accumulation. Specifically, we show that for all one sector convex technologies the equilibrium limiting growth rate of the economy is zero. In this setting capital income taxation can have paradoxical effects; it is shown that if the proceeds are used to redistribute income to the young it is possible to have a positive long run growth rate. The effect of the tax rate on the growth rate is not monotonic: for small tax rates the effect is positive, while for sufficiently high rates it is negative. Additionally, income redistribution to the young will normally have positive effects upon the long run growth rate. We then study a two sector growth model and show conditions under which the laissez faire equilibrium displays long run growth. Intuitively, the key property is that the existence of a sector producing investment goods makes it possible that, along a growth path, the relative price of capital decreases sufficiently fast and allows the young to purchase ever increasing quantities of capital. Finally, we show that in an overlawing generations setting, a one sector model can generate growth if the technology displays a nonconvexity, as this is similar to the effect of a decrease in the price

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 58 (1992)
Issue (Month): 2 (December)
Pages: 171-197

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Handle: RePEc:eee:jetheo:v:58:y:1992:i:2:p:171-197

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Web page: http://www.elsevier.com/locate/inca/622869

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References

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  1. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
  2. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  3. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  4. Stokey, Nancy L, 1988. "Learning by Doing and the Introduction of New Goods," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 701-17, August.
  5. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S126-50, October.
  6. Aiyagari, S Rao, 1989. "Can There Be Short-Period Deterministic Cycles When People Are Long Lived?," The Quarterly Journal of Economics, MIT Press, vol. 104(1), pages 163-85, February.
  7. Schmitz, James A, Jr, 1989. "Imitation, Entrepreneurship, and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 721-39, June.
  8. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Growth with Many Consumers," Discussion Papers 518, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. repec:fth:calaec:4-89 is not listed on IDEAS
  10. Easterly, William R., 1989. "Policy distortions, size of government, and growth," Policy Research Working Paper Series 344, The World Bank.
  11. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  12. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
  13. Rao Aiyagari, S., 1985. "Observational equivalence of the overlapping generations and the discounted dynamic programming frameworks for one-sector growth," Journal of Economic Theory, Elsevier, vol. 35(2), pages 201-221, August.
  14. Larry E. Jones & Rodolfo Manuelli, 1990. "A Convex Model of Equilibrium Growth," NBER Working Papers 3241, National Bureau of Economic Research, Inc.
  15. Karl Shell, 2010. "A Model of Inventive Activity and Capital Accumulation," Levine's Working Paper Archive 1409, David K. Levine.
  16. Atkinson, A B & Sandmo, A, 1980. "Welfare Implications of the Taxation of Savings," Economic Journal, Royal Economic Society, vol. 90(359), pages 529-49, September.
  17. Freeman, Scott & Polasky, Stephen, 1992. "Knowledge-based growth," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 3-24, October.
  18. Blackorby, C. & Russell, R.R., 1992. ""On the Observational Equivalence of Models with Infinitely Lived Agents and Models with Overlaping Generations"," The A. Gary Anderson Graduate School of Management 92-15, The A. Gary Anderson Graduate School of Management. University of California Riverside.
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