On the Phelps–Koopmans theorem
We examine whether the Phelps–Koopmans theorem is valid in models with nonconvex production technologies. We argue that a nonstationary path that converges to a capital stock above the smallest golden rule may indeed be efficient. This finding has the important implication that “capital overaccumulation” need not always imply inefficiency. Under mild regularity and smoothness assumptions, we provide an almost-complete characterization of situations in which every path with limit in excess of the smallest golden rule must be inefficient, so that a version of the Phelps–Koopmans theorem can be recovered. Finally, we establish that a nonconvergent path with limiting capital stocks above (and bounded away from) the smallest golden rule can be efficient, even if the model admits a unique golden rule. Thus the Phelps–Koopmans theorem in its general form fails to be valid, and we argue that this failure is robust across nonconvex models of growth.
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- Cass, David, 1972. "On capital overaccumulation in the aggregative, neoclassical model of economic growth: A complete characterization," Journal of Economic Theory, Elsevier, vol. 4(2), pages 200-223, April.
- Majumdar, Mukul & Mitra, Tapan, 1982. "Intertemporal allocation with a non-convex technology: The aggregative framework," Journal of Economic Theory, Elsevier, vol. 27(1), pages 101-136, June.