Equipment prices, human capital and economic growth

Abstract

This paper presents a multisectoral model of economic growth in which endogenous technological progress is embodied in new equipment capital. The difference in the intensity of use of human capital across sectors creates aggregate dynamic non-convexities, and hence the model may generate multiple balanced growth paths. Under standard parameter values, our model can explain the observed correlations, found for a pool of countries, between investment rates in equipment capital and income growth, on the one hand, and between the rate of decline in equipment prices and income growth, on the other. The model is then used to study the effectiveness of two public policies that have been widely implemented to promote economic growth: An equipment investment tax credit, and a tax incentive to human capital accumulation. Our results indicate that both policies have positive effects on equipment investment and on long-run growth.