Entire Capital Stock Research Articles

Dynamic effects of consumption externalities

This paper examines the dynamic effects of consumption externalities in Bosi and Seegmuller (J Math Econ 46:475–492, 2010). We show that only the patient agent holds the entire capital stock at the steady state, while the impatient agent works to finance his consumption. Our main result states that consumption externalities represent the main mechanism that explains the emergence of endogenous fluctuations due to self-fulfilling expectations. Finally, consumption externalities promote the appearance of deterministic cycles of period two.

Growth with many agents and wages paid ex ante

In this paper, we consider a one-sector model of economic growth with several infinitely-lived heterogeneous agents, who are endowed with diverse discount factors as well as preferences over consumption. In line with the classical Ramsey model, agents are not allowed to borrow against future income. Unlike the traditional assumption of ex post wage payment, wages are paid ex ante in our model. We first explain the difference between the assumptions of wages being paid ex ante and wages being paid ex post in the framework of a simple illustrative two-class model. Our main result shows that in contrast to the many-agent Ramsey model with ex post wage payment, the capital stock sequence converges to the steady state stock irrespective of production technology employed by the firms. Further, all impatient agents own zero capital stock, whereas the most patient agent owns the entire capital stock from some time onward. Thus, we have shown that a slight modification in the timing of wage payment in growth models can lead to significant changes in the stability properties of equilibrium dynamics.

Economic Growth with Institutional Saving and Investment

ABSTRACTThis article develops a two-sector growth model in which institutional investors play a significant role. A necessary and sufficient condition is established under which these investors own the entire capital stock in the long run. The dependence of the long-run growth rate on the behaviour of such investors and the effects of a productivity increase are analysed.

On Equilibrium Dynamics With Many Agents and Wages Paid Ex Ante

In this paper, we consider a one-sector model of economic growth with several infinitely-lived heterogeneous agents, who are endowed with diverse discount factors as well as preferences over consumption. In line with the classical Ramsey model, agents are not allowed to borrow against future income. Unlike the traditional assumption of ex post wage payment, wages are paid ex ante in our model. We first explain the difference between the assumptions of wages being paid ex ante and wages being paid ex post in the framework of a simple illustrative two-class model. Our main result shows that in contrast to the many-agent Ramsey model with ex post wage payment, the capital stock sequence converges to the steady state stock irrespective of production technology employed by the firms. Further, all impatient agents own zero capital stock, whereas the most patient agent owns the entire capital stock from some time onward. Thus, we have shown that a slight modification in the timing of wage payment in growth models can lead to significant changes in the stability properties of equilibrium dynamics.

A characterization of Ramsey equilibrium in a model with limited borrowing

This paper considers a one-sector economic growth model with several infinitely-lived heterogeneous households, who differ both in the discount factors as well as preferences over consumption. Unlike the extreme form of borrowing constraint observed in the classical Ramsey model, recently surveyed in Becker (2006), we allow limited borrowing by the households and prove the existence of a perfect foresight equilibrium. We also show that irrespective of production technology employed by the firms, the capital stock sequence converges to the steady state stock and from some time onward all impatient households are in the maximum borrowing state, whereas the most patient household owns entire capital stock and the debts of all other households.

A Characterization of Ramsey Equilibrium in a Model with Limited Borrowing

This paper considers a one-sector economic growth model with several infinitely - lived heterogeneous households, who differ both in the discount factors as well as preferences over consumption. Unlike the extreme form of borrowing constraint observed in the classical Ramsey model, recently surveyed in Becker (2006), we allow limited borrowing by the households and prove the existence of a perfect foresight equilibrium. We also show that irrespective of production technology employed by the firms, the capital stock sequence converges to the steady state stock and from some time onward all impatient households are in the maximum borrowing state, whereas the most patient household owns entire capital stock and the debts of all other households.

On Ramsey equilibrium: capital ownership pattern and inefficiency

We provide a sufficient condition on the production function under which eventually the most patient household owns the entire capital stock in every Ramsey equilibrium, called the turnpike property. This generalizes the result in the literature which establishes the turnpike property using the capital income monotonicity condition. We then provide an example of a Ramsey equilibrium in which the most patient household reaches a no capital position infinitely often. This is a strong refutation of the turnpike property on Ramsey equilibria. We also show that the constructed Ramsey equilibrium is inefficient in terms of the aggregate consumption stream that it provides.

On Ramsey's conjecture.

Studying a one-sector economy populated by finitely many heterogeneous households that are subject to no-borrowing constraints, we confirm a conjecture by Frank P. Ramsey according to which, in the long run, society would be divided into the set of patient households who own the entire capital stock and impatient ones without any physical wealth. More specifically, we prove (i) that there exists a unique steady state equilibrium that is globally asymptotically stable and (ii) that along every equilibrium the most patient household owns the entire capital of the economy after some finite time. Furthermore, we prove that despite the presence of the no-borrowing constraints all equilibria are efficient. Our results are derived for the continuous-time formulation of the model that was originally used by Ramsey, and they stand in stark contrast to results that – over the last three decades – have been found in the discrete-time version of the model.

On Ramsey Equilibrium: Capital Ownership Pattern and Inefficiency

We provide a sufficient condition on the production function under which eventually the most patient household owns the entire capital stock in every Ramsey Equilibrium, called the turnpike property. This generalizes the result in the literature which establishes the turnpike property using the capital income monotonicity condition. We then provide an example of a Ramsey Equilibrium in which the most patient household reaches a no capital position infinitely often. This is a strong refutation of the turnpike property on Ramsey equilibria. We also show that the constructed Ramsey equilibrium is inefficient in terms of the aggregate consumption stream that it provides.

Money with Idiosyncratic Uninsurable Returns to Capital

This paper extends the income fluctuations problem to an economy with endogenous growth. Individuals, instead of owning a stream of endowments, accumulate capital with an investment irreversibility constraint and face uninsurable idiosyncratic risks to the return to capital. Money provides both a risk diversification and a liquidity role. Balanced growth paths exist despite the increasing dispersion of the wealth distribution. The return to money cannot be equated to the social return to capital unless the government owns the entire capital stock with idiosyncratic risk and it is capable of operating this stock as efficiently as private agents can. Journal of Economic Literature Classification Numbers: E31, E42, E58.

Is technical change embodied in the capital stock or new investment?

The question of technical change and productivity growth is one of the fundamental empirical issues of our time. Surprisingly, Solow's original question of whether technical change is embodied in investment or the entire capital stock has been largely neglected. This paper seeks to bridge the early work of Solow and others on the extent of embodiment of technical change with the more modern approach to estimating the structure of production and technical change using multifactor cost functions. We also attempted to identify the source and structural nature of embodied technical change by decomposing it. Our theoretical model is applied to a pooled cross-section of six OECD countries for the 1965–1989 period. Our preferred model is one of full factor-augmenting embodied technical change because technical change augmenting the entire capital stock tends to overstate quality change in the aggregate capital stock more than that embodied in new investment. This model specification supports the view that technical change is embodied in the stock of capital structure and is embodied in new investment of capital equipment.

Saving, investment, growth and the cost of financial repression

This paper presents a quantitative estimate of the cost of financial repression in developing countries. Here, financial repression is interpreted as the technique of holding institutional interest rates (particularly deposit rates of interest) below their market equilibrium levels. For a sample of developing countries, saving is found to be affected positively by the real deposit rate of interest, as is real money demand, where money is defined broadly to include savings and time deposits. Under disequilibrium interest rate conditions, higher saving which raises real money demand increases pari passu the real supply of credit. Credit availability is an important determinant not only of new investment but also of capacity utilization of the entire capital stock. Hence, the growth rate is itself affected positively by the real deposit rate of interest through two channels – first, the volume of saving and investment and, second, capacity utilization of the entire capital stock, i.e. the measured incremental capital/output ratio. Estimates of saving and growth functions lead to the conclusion that the cost of financial repression appears to be around half a percetage point in economic growth foregone for every one percentage point by which the real deposit rate of interest is set below its market equilibrium rate.