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Endogenous productivity and multiple steady states

  • Levon Barseghyan
  • Riccardo DiCecio

We endogenize total factor productivity in a neoclassical model with increasing returns to scale. We obtain multiple steady-state equilibria with an arbitrarily small degree of increasing returns to scale. While the most productive firms operate across all the steady states, in a poverty trap less productive firms operate as well. This results in lower average firm productivity and total factor productivity. A calibrated version of our model displays sizable differences in TFP and output across steady state equilibria.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2008-023.

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Date of creation: 2008
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Handle: RePEc:fip:fedlwp:2008-023
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