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Optimal Growth Strategy Under Dynamic Threshold

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  • Cuong Le Van
  • Cagri Saglam
  • Agah Turan

Abstract

We consider an economy in which the technology exhibits nonconvexities due to fixed costs associated with production. Taking into account the incentives for investment to decrease the fixed costs, we characterize the circumstances under which an underdeveloped economy can catch up with the developing ones. We show that it is optimal to get rid of the fixed costs inherent in production at a finite period of time so that the economy will eventually converge to a positive steady state level of per capita income independent of the initial level of capital stock. Indeed, we obtain that even though the income disparities may be very persistent and can be perceived as poverty traps, all economies would ultimately converge to the same steady state level of per capita income.

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Bibliographic Info

Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-123.

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Length: 23 pages
Date of creation: 25 Feb 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-123

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Keywords: Optimal Growth; Nonconvex technology; Poverty trap;

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  1. Dechert, W. Davis & Nishimura, Kazuo, 1983. "A complete characterization of optimal growth paths in an aggregated model with a non-concave production function," Journal of Economic Theory, Elsevier, vol. 31(2), pages 332-354, December.
  2. repec:hal:cesptp:halshs-00197556 is not listed on IDEAS
  3. Quah, Danny T, 1996. " Convergence Empirics across Economies with (Some) Capital Mobility," Journal of Economic Growth, Springer, vol. 1(1), pages 95-124, March.
  4. Kraay, Aart & Raddatz, Claudio, 2007. "Poverty traps, aid, and growth," Journal of Development Economics, Elsevier, vol. 82(2), pages 315-347, March.
  5. Jones, Charles I, 1997. " Convergence Revisited," Journal of Economic Growth, Springer, vol. 2(2), pages 131-53, July.
  6. Hanjra, Munir A. & Ferede, Tadele & Gutta, Debel Gemechu, 2009. "Pathways to breaking the poverty trap in Ethiopia: Investments in agricultural water, education, and markets," Agricultural Water Management, Elsevier, vol. 96(11), pages 1596-1604, November.
  7. Quah, Danny, 1997. "Empirics for Growth and Distribution: Stratification, Polarization, and Convergence Clubs," CEPR Discussion Papers 1586, C.E.P.R. Discussion Papers.
  8. Takashi Kamihigashi & Santanu Roy, 2003. "A Nonsmooth, Nonconvex Model of Optimal Growth," Discussion Paper Series 139, Research Institute for Economics & Business Administration, Kobe University.
  9. Yoshino, Yutaka, 2008. "Domestic constraints, firm characteristics, and geographical diversification of firm-level manufacturing exports in Africa," Policy Research Working Paper Series 4575, The World Bank.
  10. Ken-Ichi Akao & Takashi Kamihigashi & Kazuo Nishimura, 2011. "Monotonicity and Continuity of the Critical Capital Stock in the Dechert-Nishimura Model," Discussion Paper Series DP2011-20, Research Institute for Economics & Business Administration, Kobe University, revised Sep 2011.
  11. repec:hal:cesptp:halshs-00267100 is not listed on IDEAS
  12. N. M. Hung & Cuong Le Van & P. Michel, 2008. "Non-convex Aggregate Technology and Optimal Economic Growth," Working Papers 05, Development and Policies Research Center (DEPOCEN), Vietnam.
  13. repec:hal:journl:halshs-00267100 is not listed on IDEAS
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