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Multiple Equilibria and Indeterminacy in an Optimal Growth Model with Endogenous Capital Depreciation

Author

Listed:
  • Gaowang Wang

    (Wuhan University)

  • Heng-fu Zou

    (Central University of Economics and Finance and Wuhan University)

Abstract

This paper extends an otherwise standard one-sector neoclassical growth model by postulating that the depreciation rate of physical capital depends on the agent's efforts on maintenance and repairs. Specifically, we introduce endogenous depreciation into the standard optimal growth model via two different mechanisms and examine the steady state and the dynamics of the model economy qualitatively and quantitatively. We find that with plausibel parameter values, multiple equilibria and indeterminacy can arise in simply modified optimal growth model.

Suggested Citation

  • Gaowang Wang & Heng-fu Zou, 2010. "Multiple Equilibria and Indeterminacy in an Optimal Growth Model with Endogenous Capital Depreciation," CEMA Working Papers 392, China Economics and Management Academy, Central University of Finance and Economics.
  • Handle: RePEc:cuf:wpaper:392
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    References listed on IDEAS

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    3. Engelbert Dockner & Gustav Feichtinger, 1991. "On the optimality of limit cycles in dynamic economic systems," Journal of Economics, Springer, vol. 53(1), pages 31-50, February.
    4. Seiya Fujisaki & Kazuo Mino, 2010. "Long-Run Impacts of Inflation Tax with Endogenous Capital Depreciation," Economics Bulletin, AccessEcon, vol. 30(1), pages 808-816.
    5. Gylfason, Thorvaldur & Zoega, Gylfi, 2007. "A golden rule of depreciation," Economics Letters, Elsevier, vol. 96(3), pages 357-362, September.
    6. Evans, Geroge W & Honkapohja, Seppo & Romer, Paul, 1998. "Growth Cycles," American Economic Review, American Economic Association, vol. 88(3), pages 495-515, June.
    7. Dangl, Thomas & Wirl, Franz, 2004. "Investment under uncertainty: calculating the value function when the Bellman equation cannot be solved analytically," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1437-1460, April.
    8. William J. Baumol, 1971. "Optimal Depreciation Policy: Pricing the Products of Durable Assets," Bell Journal of Economics, The RAND Corporation, vol. 2(2), pages 638-656, Autumn.
    9. Jess Benhabib & Qinglai Meng & Kazuo Nishimura, 2000. "Indeterminacy under Constant Returns to Scale in Multisector Economies," Econometrica, Econometric Society, vol. 68(6), pages 1541-1548, November.
    10. Bitros, George C, 1976. "A Statistical Theory of Expenditures in Capital Maintenance and Repair," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 917-936, October.
    11. Howitt, Peter & McAfee, R Preston, 1992. "Animal Spirits," American Economic Review, American Economic Association, vol. 82(3), pages 493-507, June.
    12. Boldrin, Michele & Montrucchio, Luigi, 1986. "On the indeterminacy of capital accumulation paths," Journal of Economic Theory, Elsevier, vol. 40(1), pages 26-39, October.
    13. Rioja, Felix K., 2003. "Filling potholes: macroeconomic effects of maintenance versus new investments in public infrastructure," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2281-2304, September.
    14. Spear, Stephen E., 1991. "Growth, externalities, and sunspots," Journal of Economic Theory, Elsevier, vol. 54(1), pages 215-223, June.
    15. Leonardo Auernheimer, 1986. "Variable Depreciation and Some of Its Implications," Canadian Journal of Economics, Canadian Economics Association, vol. 19(1), pages 99-113, February.
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    More about this item

    Keywords

    Multiple Equilibria; Indeterminacy; Endogenous Depreciation;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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