The Leontief Two-sector Model and Undiscounted Optimal Growth with Irreversible Investment: The Case of Labor-intensive Consumption Goods

Abstract

This essay reports results on optimal growth in a Leontief two-sector model originally formulated by Bruno and analyzed in discrete time by Nishimura-Yano. Applying geometric methods pioneered by Khan-Mitra, we derive a complete characterization of optimal policy. Assuming that the consumption goods sector is more labor-intensive, our results depart from those in the capital-intensive case: (i) every optimal program is monotonic, (ii) every optimal program converges to the golden-rule stock in a finite number of periods, and (iii) every optimal program undergoes either unemployment or excess capacity of capital.