Indeterminacy and Endogenous Growth with Social Constant Returns

Abstract

By examining endogenous growth models with physical and human capital, this paper demonstrates that indeterminacy of equilibrium may emerge even in the absence of increasing returns to scale. The model we examine consists of two production sectors: one produces final goods and the other produces new human capital. Both sectors use physical as well as human capital. It is assumed that while the private technology of the representative firm in each sector exhibits decreasing returns to scale, the social technologies of both sectors satisfy constant returns because of the presence of sector-specific externalities. We demonstrate that a small divergence between private and social factor intensity conditions generates indeterminacy of equilibrium rather easily even under constant returns. Intuitive implications of the source of indeterminacy and a generalization of the model are also presented. Journal of Economic Literature, Classification Numbers: D90, O40, O41.