A General Two-Sector Model of Endogenous Growth with Human and Physical Capital: Balanced Growth and Transitional Dynamics

Abstract

We examine a two-sector endogenous growth model with general constant-return-to-scale production technologies governing the evolution of human and physical capital. We prove the existence, uniqueness, and saddle-path stability of the balanced growth equilibrium. A dual approach drawing on techniques from international trade theory is used to provide complete characterization of the transitional dynamics of consumption, goods and education outputs, human and physical capital inputs, and the relative price of human capital investment. We investigate the long-run effects of changes in time preference and factor taxation, and show the emergence of instability or indeterminacy when factor taxes are too distortionary.Journal of Economic LiteratureClassification Number: D90.