Neoclassical Technology Research Articles

Technologies for endogenous growth

I microfound endogenous growth through neoclassical technologies with substitutable inputs created by monopolistically competitive innovators. Investment delivers innovations of declining profitability, but increasing labor force generates growth depending on structural technological parameters that determine the elasticities of profits and output with respect to the mass of inputs. For instance, with a Cobb–Douglas technology in labor and a CES aggregator of inputs, the growth rate declines with the substitutability between inputs and increases in the share of inputs in production. I also explore other classes of technologies and novel specifications that can deliver long run growth.

Asset Prices and Pandemics: The Effects of Lockdowns

We examine the impact of pandemics on equilibrium in an integrated epidemic-economy model with production. Two types of technologies are considered: a neo-classical technology and one capturing the notion of time-to-produce. The impact of a shelter-in-place policy with and without layoffs is studied. The paper documents adjustments in interest rate, market price of risk, stock market and real wage as the epidemic propagates. It shows the qualitative effects of a shelter-in-place policy in the model are consistent with the patterns displayed by the stock market and real wage during the COVID-19 outbreak. Puzzles emerging from the analysis are outlined.

Asset Prices and Pandemics: The Effects of Lockdowns

We examine the impact of pandemics on equilibrium in an integrated epidemic-economy model with production. Two types of technologies are considered: a neoclassical technology and one capturing the notion of time-to-produce. The impact of a shelter-in-place policy with and without layoffs is studied. The paper documents adjustments in interest rate, market price of risk, stock market and real wage as the epidemic propagates. It shows the qualitative effects of a shelter-in-place policy in the model are consistent with the patterns displayed by the stock market and real wage during the COVID-19 outbreak. Puzzles emerging from the analysis are outlined.

Asset Prices and Pandemics

We examine the impact of pandemics propagation mechanisms on equilibrium prices, volatilities, risk premia, interest rate, wages and stock prices in an integrated epidemic-economy model with production. Two types of technologies are examined: a neo-classical technology and one capturing the notion of time-to-produce. Results show the interest rate displays cyclical behavior, wages tend to increase and stock prices can also cycle during an outbreak. The impact of a shelter-in-place policy with and without layoffs is examined. Equilibrium displays cycles under the welfare maximizing shelter-in-place policy.

Peculiarities of technoscience, technics, technology and their humanitarian and moral comprehension

The article explores the problem of humanitarian and moral assessment and measurement of contemporary neoclassical and post-neoclassical technics and technologies. Foreign and domestic scholars are involved in the discourse. The author develops a new moral imperative of the technogenic civilization: execute and use technical and technological construction of the world for the common good rather than harm.

Optimal portfolios with wealth-varying risk aversion in the neoclassical growth model

This paper provides a rationale for fixed portfolios that exhibit fund separation as an optimal general equilibrium strategy when heterogeneous investors have wealth-varying relative risk aversion in the context of the standard stochastic neoclassical growth model. Agents’ wealth heterogeneity varies endogenously through time. Preferences exhibit linear risk tolerance with respect to consumption, consumption and labor are separable and the momentary utility function for leisure is isoelastic. Production possibilities are represented by J neoclassical technologies which are subject to shocks. I show that any competitive equilibrium allocation that is Pareto optimal can be supported by means of constant portfolios with only a few assets: a mutual fund of stocks, a consol and two other securities perfectly linearly correlated with aggregate labor income and the wage rate. Remarkably, this result holds in spite of the changing degree of agents’ heterogeneity and wealth-varying relative risk aversion, both stemming from movements in the stock of capital.

Endogenous technological progress in a multi-sector growth model

This paper presents an endogenous growth model driven by human capital, where human capital can be allocated across three sectors: the production of the final consumption good, the educational sector and the production of technological capital (in the form of knowledge or ideas). In our model, which also includes public expenditure and population growth, labor augmenting technical progress is endogenous and this enriches the transitional dynamics of the economy. With respect to ideas-based growth models, we assume knowledge is produced according to a neoclassical technology, combining ideas and human capital. Such an assumption is motivated by empirical works showing the existence of significant decreasing returns in the creation of ideas at the aggregate level (as Kortum, 1993; and Pessoa, 2005) and of the weak relationship between some inputs of the knowledge production process (as the number of researchers) and the total factor productivity growth rate (as Jones, 2002). Under some general conditions, this economy exhibits the existence of a steady state equilibrium and an unstable multidimensional manifold. Numerical examples are provided to show the existence of stable arms.

On myopia as rationale for social security

It has been argued that “paternalistically motivated forced savings constitutes an important, and to some the most important, rationale for social security retirement systems.” This paper revisits the role played by myopia in generating a theoretical rationale for pay-as-you-go (PAYG) social security in dynamically efficient economies. If the competing asset is linear storage and myopic agents are allowed to borrow against future pension benefits, there is no welfare-rationale for PAYG pensions. Sufficiently strong myopia may justify such pensions only if agents cannot borrow against their future pension, but then they are at a zero-saving corner. With enough myopia, co-existence of positive optimal pensions and positive private saving is possible if the return to saving declines with saving, as in a model with a neoclassical technology.

Neoclassical production theory and growth with unemployment: The stability issue revisited

A common belief in economic growth theory is that the instability of the balanced growth path of models based on a non-neoclassical production theory, such as the Harrod–Domar or Goodwin-type models, may be removed by introducing neoclassical technology and substitutability between factors. This does not need to be true. As shown in this paper, Solow-type models with sluggishly adjusting, non-market-clearing, real wages and endogenous fertility may suffer instability. Not only: instability may be favoured by too strong a degree of neoclassical substitution in the economy.

EQUAL ORGANIC COMPOSITION OF CAPITAL AND REGULARITY

Equal organic composition of capital (EOCC) is shown to be a necessary and sufficient condition for constant relative prices in no-joint production technologies with neoclassical production functions. It is then proved that such neoclassical technologies are regular (which implies that consumption is well behaved across steady-state equilibria). Regularity is also a necessary and sufficient condition for near aggregation (which implies an aggregate production function with all but one of the usual neoclassical properties). Except perhaps for some fluke cases, the existence of an aggregate production function with all of the usual neoclassical properties (full aggregation) requires the stronger EOCC property.

An Analytical Introduction to Dynamic Optimization: The Robinson Crusoe Economy

Dynamic optimization is an essential tool of modern macroeconomics. We suggest to teach this technique based on a simplified version of the Uzawa-Lucas model of endogenous growth. Using this model it is possible to present the key concepts of dynamic optimization without applying linearization techniques. Even though the model assumes a concave utility function and a neoclassical production technology, we will state the stable and the unstable solution branches in the phase diagram in closed-form. Saddle path behaviour and the role of transversality conditions can therefore be studied extensively without using complicated mathematical tools. We also show how homogeneity in the initial conditions, a property that applies to almost all macroeconomic models, can be used to introduce a simple numerical solution method.

THE TWO-SECTOR VON THÜNEN ORIGINAL MARGINAL PRODUCTIVITY MODEL OF CAPITAL; AND BEYOND

This article considers a two-sector model of scalar capital from the perspectives of smoothly differentiable neoclassical technologies and also non-differentiable technologies based on discrete alternative Leontief–Sraffa techniques. The analysis shows that in these Thünen-like scenarios without joint production the real wage and the interest rate are necessarily in an inverse Ricardian tradeoff. This complements the findings of Samuelson and Etula (2006, Japan and the World Economy, 18, pp. 331–356) and completes the analysis of single homogeneous scalar capital.

On Myopia as Rationale for Social Security

This paper revisits the role played by myopia in generating a theoretical rationale for pay-as-you-go social security in dynamically efficient economies. Contrary to received wisdom, if the real interest rate is exogenously fixed, enough myopia may justify public pensions but never alongside positive private savings. With sufficient myopia, co-existence of positive optimal pensions and positive private saving is possible if the real interest rate on saving evolves endogenously, as in a model with a neoclassical technology.

Capital Taxation: Quantitative Explorations of the Inverse Euler Equation

This paper studies the efficiency gains from distorting savings in dynamic Mirrleesian private-information economies. We develop a method that pertubs the consumption process optimally, while preserving incentive compatibility. The Inverse Euler equation holds at the new optimized allocation. Starting from an equilibrium where agents can save freely allows us to compute the efficiency gains from savings disortions. We investigate how these gains depend on a limited set of features of the economy. We find an important role for general equilibrium effects. In particular, efficiency gains are greatly reduced when, rather than assuming a fixed interest rate, decreasing returns to capital are incorporated with a neoclassical technology. We compute the efficiency gains for the incomplete market model in Aiyagari [1994] and find them to be relatively modest for the baseline calibration. For higher levels of uncertainty, the efficiency gains can be sizable, but we find that most of the improvements can then attributed to the relaxation of borrowing constraints, rather than the introduction of savings distortions.

General equilibrium dynamics of multi-sector growth models

This paper analyzes Walrasian general equilibrium systems and calculates the static and dynamic solutions for competitive market equilibria. The Walrasian framework encompasses the basic multi-sector growth (MSG) models with neoclassical production technologies inN sectors (industries). The endogenous behavior of all the relative prices are analyzed in detail, as are sectorial allocations of the primary factors, labor and capital. Dynamic systems of Walrasian multi-sector economies and the family of solutions (time paths) for steady-state and persistent growth per capita are parametrically characterized. The technology parameters of the capital good industry are decisive for obtaining long-run per capita growth in closed (global) economies. Brief comments are offered on the MSG literature, together with apects on the studies of industrial (structural) evolution and economic history.

Idiosyncratic Production Risk, Growth, and the Business Cycle

We introduce a neoclassical growth economy with idiosyncratic production risk and incomplete markets. Each agent is an entrepreneur operating her own neoclassical technology with her own capital stock. The general equilibrium is characterized in closed form. Idiosyncratic production shocks introduce a risk premium on private equity and reduce the demand for investment. The steady state is characterized by a lower capital stock due to entrepreneurial risk and a lower interest rate due to precautionary savings as compared to complete markets. The private equity premium is endogenously countercyclical: the anticipation of low savings and high interest rates in the future feed back to high risk premia and low investment in the present. Countercyclicality in risk taking slows down convergence to the steady state and amplifies the magnitude and persistence of the business cycle. These results, which contrast sharply with those obtained in Bewley models, highlight the macroeconomic significance of missing markets in production and investment risk.

Increasing Returns to Scale in Affluent Knowledge‐Rich Economies

This paper departs from the existing growth literature in not assuming a priori a specific production technology and offering instead a theory of production technology that captures the effects of changes in the level, composition, and forces of accumulation of capital on the productivity of an economy. The theory of production technology shows that an affluent knowledge‐rich economy violates the Inada second condition because of its high level of knowledge, human, and social capital. Substitution of knowledge capital for physical capital and the self‐reinforcing nature of the process of accumulation of knowledge, human, and social capital are the engines of growth in such economies. Poor economies, on the other hand, may exhibit neoclassical production technology of diminishing returns to capital and get trapped into a low‐level steady state owing to their ever‐growing need for physical capital and also to unfavorable supply conditions for knowledge capital, lower levels of knowledge, human, and social capital in these economies being inadequate to trigger the self‐reinforcing dynamics. The mechanics of endogenous growth are essentially different in rich and poor economies because the production possibility surface is non‐convex in the former, and this difference explains the sustained divergence of their growth rates.

On the gains from an expansion in factor mobility in bilateral trade

A single composite-good two-factor input production model is employed to investigate the gains from an expansion in factor mobility between two countries with different neoclassical technologies. Necessary and sufficient conditions for both countries to gain from an expansion in factor mobility are established. The analysis then develops a criterion based on market information for predicting whether a country would gain from an expansion in factor mobility. Finally, the income distributional effects within and between countries of an expansion in factor mobility are discussed.

Growth and stability in a model with Pasinettian saving behaviour and neoclassical technology

We analyse a Kaldor–Pasinetti two‐class model of growth and distribution in which fiscal activity is explicitly introduced along the lines of Pasinetti (‘Ricardian Debt/Taxation Equivalence in the Kaldor Theory of Profits and Income Distribution’, Cambridge Journal of Economics, Vol. 13 (1989), pp. 25–36). Following the approach of Darity (‘A Simple Analytics of Neo‐Ricardian Growth and Distribution’, American Economic Review, Vol. 71 (1981), pp. 978–993) the model is reduced to a dynamic system where the Cambridge equation is one of the possible steady‐state solutions. The conditions for its local stability are studied and a numerical example is presented. The anti‐dual case is more likely to occur in order to guarantee the local stability of the Cambridge equation.

Testing the impact of taxation on capacity choice: A ‘putty clay’ approach

We investigate the impact of taxation on a sample of Canadian copper mines based on a ‘putty clay’ model, i.e. focusing on plant creations and major capacity changes. Our theoretical analysis shows that the cost of capital differs in such an instance from its counterpart under a flexible neoclassical technology, particularly in the way the resource rent component enters the formula. Besides the influence of geological variables, our econometric results establish the effect of (net of federal, provincial, and mining taxes) expected prices on capacity choice. We complement these results by identifying a significant influence of tax characteristics, as distinct from the influence of gross prices per se.