Finite Lifetimes and Growth
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 of capital: it prevents the ratio of the value of capital am the level of wealth of the young from exceeding one.
|Date of creation:||Oct 1990|
|Publication status:||published as Journal of Economic Theory Volume 58 December 1992|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lucas, Robert Jr. & Stokey, Nancy L., 1984.
"Optimal growth with many consumers,"
Journal of Economic Theory,
Elsevier, vol. 32(1), pages 139-171, February.
- Sergio Rebelo, 1999.
"Long Run Policy Analysis and Long Run Growth,"
Levine's Working Paper Archive
2114, David K. Levine.
- Atkinson, A B & Sandmo, A, 1980. "Welfare Implications of the Taxation of Savings," Economic Journal, Royal Economic Society, vol. 90(359), pages 529-549, September.
- repec:cdl:ucsbec:4-89 is not listed on IDEAS
- Kenneth J. Arrow, 1962. "The Economic Implications of Learning by Doing," Review of Economic Studies, Oxford University Press, vol. 29(3), pages 155-173.
- Larry E. Jones & Rodolfo Manuelli, 1990. "A Convex Model of Equilibrium Growth," NBER Working Papers 3241, National Bureau of Economic Research, Inc.
- 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.
- Schmitz, James A, Jr, 1989. "Imitation, Entrepreneurship, and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 721-739, June.
- Romer, Paul M, 1986.
"Increasing Returns and Long-run Growth,"
Journal of Political Economy,
University of Chicago Press, vol. 94(5), pages 1002-1037, October.
- Barro, Robert J., 1974.
"Are Government Bonds Net Wealth?,"
3451399, Harvard University Department of Economics.
- 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 701-717, August.
- Nancy L Stokey, 1986. "Learning-by-Doing and the Introduction of New Goods," Discussion Papers 699, Northwestern University, Center for Mathematical Studies in Economics and Management Science, revised May 1987.
- Karl Shell, 2010. "A Model of Inventive Activity and Capital Accumulation," Levine's Working Paper Archive 1409, David K. Levine.
- 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.
- S. Rao Aiyagari, 1988.
"Can there be short-period deterministic cycles when people are long lived?,"
114, Federal Reserve Bank of Minneapolis.
- S. Rao Aiyagari, 1989. "Can There Be Short-Period Deterministic Cycles When People Are Long Lived?," The Quarterly Journal of Economics, Oxford University Press, vol. 104(1), pages 163-185.
- Freeman, Scott & Polasky, Stephen, 1992. "Knowledge-based growth," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 3-24, October.
- Bencivenga, V.R. & Smith, B.D., 1988.
"Financial Intermediation And Endogenous Growth,"
RCER Working Papers
124, University of Rochester - Center for Economic Research (RCER).
- King, R.G. & Rebelo, S., 1988.
"Public Policy And Economic Growth: Developing Neoclassical Implications,"
RCER Working Papers
225, University of Rochester - Center for Economic Research (RCER).
- 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 126-150, October.
- Robert G. King & Sergio Rebelo, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," NBER Working Papers 3338, National Bureau of Economic Research, Inc.
- William Easterly, 1989.
"Policy Distortions, Size of Government, and Growth,"
NBER Working Papers
3214, National Bureau of Economic Research, Inc.
- Easterly, William R., 1989. "Policy distortions, size of government, and growth," Policy Research Working Paper Series 344, The World Bank.
- Costas Azariadis & Allan Drazen, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 501-526.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3469. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.