Introduction to Modern Economic Growth

739 Pages·2007·3.77 MB·English

Introduction to Modern
Economic Growth
Daron Acemoglu
Department of Economics,
Massachusetts Institute of Technology

Contents
Preface xi
Part 1. Introduction 1
Chapter 1. Economic Growth and Economic Development:
The Questions 3
1.1. Cross-Country Income Differences 3
1.2. Income and Welfare 8
1.3. Economic Growth and Income Differences 11
1.4. Origins of Today’s Income Differences and World Economic Growth 14
1.5. Conditional Convergence 19
1.6. Correlates of Economic Growth 23
1.7. From Correlates to Fundamental Causes 26
1.8. The Agenda 29
1.9. References and Literature 32
Chapter 2. The Solow Growth Model 37
2.1. The Economic Environment of the Basic Solow Model 38
2.2. The Solow Model in Discrete Time 48
2.3. Transitional Dynamics in the Discrete Time Solow Model 61
2.4. The Solow Model in Continuous Time 66
2.5. Transitional Dynamics in the Continuous Time Solow Model 71
2.6. Solow Model with Technological Progress 79
2.7. Comparative Dynamics 92
2.8. Taking Stock 94
2.9. References and Literature 95
2.10. Exercises 97
Chapter 3. The Solow Model and the Data 103
3.1. Growth Accounting 103
3.2. Solow Model and Regression Analyses 107
3.3. The Solow Model with Human Capital 117
3.4. Solow Model and Cross-Country Income Differences: Regression
Analyses 125
3.5. Calibrating Productivity Differences 135
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3.6. Estimating Productivity Differences 141
3.7. Taking Stock 148
3.8. References and Literature 150
3.9. Exercises 151
Chapter 4. Fundamental Determinants of Differences in Economic
Performance 155
4.1. Proximate Versus Fundamental Causes 155
4.2. Economies of Scale, Population, Technology and World Growth 160
4.3. The Four Fundamental Causes 163
4.4. The Effect of Institutions on Economic Growth 178
4.5. What Types of Institutions? 199
4.6. Disease and Development 202
4.7. Political Economy of Institutions: First Thoughts 206
4.8. Taking Stock 207
4.9. References and Literature 208
4.10. Exercises 211
Part 2. Towards Neoclassical Growth 213
Chapter 5. Foundations of Neoclassical Growth 215
5.1. Preliminaries 215
5.2. The Representative Household 218
5.3. Infinite Planning Horizon 226
5.4. The Representative Firm 229
5.5. Problem Formulation 232
5.6. Welfare Theorems 233
5.7. Sequential Trading 241
5.8. Optimal Growth in Discrete Time 245
5.9. Optimal Growth in Continuous Time 246
5.10. Taking Stock 247
5.11. References and Literature 248
5.12. Exercises 250
Chapter 6. Dynamic Programming and Optimal Growth 255
6.1. Brief Review of Dynamic Programming 256
6.2. Dynamic Programming Theorems 260
6.3. The Contraction Mapping Theorem and Applications* 266
6.4. Proofs of the Main Dynamic Programming Theorems* 272
6.5. Fundamentals of Dynamic Programming 280
6.6. Optimal Growth in Discrete Time 291
6.7. Competitive Equilibrium Growth 297
6.8. Another Application of Dynamic Programming: Search for Ideas 299
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Introduction to Modern Economic Growth
6.9. Taking Stock 305
6.10. References and Literature 306
6.11. Exercises 307
Chapter 7. Review of the Theory of Optimal Control 313
7.1. Variational Arguments 314
7.2. The Maximum Principle: A First Look 324
7.3. Infinite-Horizon Optimal Control 330
7.4. More on Transversality Conditions 342
7.5. Discounted Infinite-Horizon Optimal Control 345
7.6. A First Look at Optimal Growth in Continuous Time 351
7.7. The q-Theory of Investment 352
7.8. Taking Stock 359
7.9. References and Literature 361
7.10. Exercises 363
Part 3. Neoclassical Growth 371
Chapter 8. The Neoclassical Growth Model 373
8.1. Preferences, Technology and Demographics 373
8.2. Characterization of Equilibrium 378
8.3. Optimal Growth 383
8.4. Steady-State Equilibrium 384
8.5. Transitional Dynamics 387
8.6. Technological Change and the Canonical Neoclassical Model 390
8.7. Comparative Dynamics 398
8.8. The Role of Policy 400
8.9. A Quantitative Evaluation 402
8.10. Extensions 405
8.11. Taking Stock 406
8.12. References and Literature 407
8.13. Exercises 408
Chapter 9. Growth with Overlapping Generations 417
9.1. Problems of Infinity 418
9.2. The Baseline Overlapping Generations Model 421
9.3. The Canonical Overlapping Generations Model 427
9.4. Overaccumulation and Pareto Optimality of Competitive Equilibrium
in the Overlapping Generations Model 429
9.5. Role of Social Security in Capital Accumulation 433
9.6. Overlapping Generations with Impure Altruism 436
9.7. Overlapping Generations with Perpetual Youth 441
9.8. Overlapping Generations in Continuous Time 445
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Introduction to Modern Economic Growth
9.9. Taking Stock 453
9.10. References and Literature 455
9.11. Exercises 456
Chapter 10. Human Capital and Economic Growth 463
10.1. A Simple Separation Theorem 463
10.2. Schooling Investments and Returns to Education 466
10.3. The Ben Porath Model 469
10.4. Neoclassical Growth with Physical and Human Capital 474
10.5. Capital-Skill Complementarity in an Overlapping Generations Model 480
10.6. Physical and Human Capital with Imperfect Labor Markets 485
10.7. Human Capital Externalities 492
10.8. Nelson-Phelps Model of Human Capital 495
10.9. Taking Stock 498
10.10. References and Literature 500
10.11. Exercises 502
Chapter 11. First-Generation Models of Endogenous Growth 505
11.1. The AK Model Revisited 506
11.2. The AK Model with Physical and Human Capital 513
11.3. The Two-Sector AK Model 516
11.4. Growth with Externalities 521
11.5. Taking Stock 526
11.6. References and Literature 528
11.7. Exercises 529
Part 4. Endogenous Technological Change 535
Chapter 12. Modeling Technological Change 537
12.1. Different Conceptions of Technology 537
12.2. Science, Profits and the Market Size 542
12.3. The Value of Innovation in Partial Equilibrium 545
12.4. The Dixit-Stiglitz Model and “Aggregate Demand Externalities” 555
12.5. Individual R&D Uncertainty and the Stock Market 562
12.6. Taking Stock 564
12.7. References and Literature 565
12.8. Exercises 567
Chapter 13. Expanding Variety Models 571
13.1. The Lab Equipment Model of Growth with Product Varieties 572
13.2. Growth with Knowledge Spillovers 586
13.3. Growth without Scale Effects 589
13.4. Growth with Expanding Product Varieties 593
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13.5. Taking Stock 598
13.6. References and Literature 600
13.7. Exercises 601
Chapter 14. Models of Competitive Innovations 609
14.1. The Baseline Model of Competitive Innovations 610
14.2. A One-Sector Schumpeterian Growth Model 623
14.3. Step-by-Step Innovations* 629
14.4. Taking Stock 645
14.5. References and Literature 646
14.6. Exercises 647
Chapter 15. Directed Technological Change 655
15.1. Importance of Biased Technological Change 656
15.2. Basics and Definitions 660
15.3. Baseline Model of Directed Technological Change 663
15.4. Directed Technological Change with Knowledge Spillovers 681
15.5. Directed Technological Change without Scale Effects 686
15.6. Endogenous Labor-Augmenting Technological Change 688
15.7. Other Applications 692
15.8. Taking Stock 693
15.9. References and Literature 694
15.10. Exercises 698
Part 5. Stochastic Growth 705
Chapter 16. Stochastic Dynamic Programming 707
16.1. Dynamic Programming with Expectations 707
16.2. Policy Functions and Transitions 707
16.3. Few Technical Details* 707
16.4. Applications of Stochastic Dynamic Programming 707
16.5. Taking Stock 707
16.6. References and Literature 707
16.7. Exercises 707
Chapter 17. Neoclassical Growth Under Uncertainty 709
17.1. The Brock-Mirman Model 709
17.2. Equilibrium Growth under Uncertainty 710
17.3. Application: Real Business Cycle Models 710
17.4. Taking Stock 710
17.5. References and Literature 710
17.6. Exercises 710
Chapter 18. Growth with Incomplete Markets 711
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Introduction to Modern Economic Growth
18.1. The Bewley-Aiyagari Model 711
18.2. Risk, Diversification and Growth 711
18.3. Taking Stock 711
18.4. References and Literature 711
18.5. Exercises 711
Part 6. Technology Diffusion, Trade and Interdependences 713
Chapter 19. Diffusion of Technology 715
19.1. Importance of Technology Adoption and Diffusion 715
19.2. A Benchmark Model of Technology Diffusion 715
19.3. Human Capital and Technology 715
19.4. Technology Diffusion and Endogenous Growth 716
19.5. Appropriate Technology and Productivity Differences 716
19.6. Inappropriate Technologies 717
19.7. Endogenous Technological Change and Appropriate Technology 718
19.8. Taking Stock 723
19.9. References and Literature 723
19.10. Exercises 723
Chapter 20. Trade, Technology and Interdependences 725
20.1. Trade, Specialization and the World Income Distribution 725
20.2. Trade, Factor Price Equalization and Economic Growth 731
20.3. Trade, Technology Diffusion and the Product Cycle 732
20.4. Learning-by-Doing, Trade and Growth 736
20.5. Trade and Endogenous Technological Change 736
20.6. Taking Stock 736
20.7. References and Literature 736
20.8. Exercises 736
Part 7. Economic Development and Economic Growth 737
Chapter 21. Structural Change and Economic Growth 739
21.1. Non-Balanced Growth: The Demand Side 739
21.2. Non-Balanced Growth: The Supply Side 743
21.3. Structural Change: Migration 743
21.4. Structural Change: Transformation of Productive Relationships 743
21.5. Towards a Unified Theory of Development and Growth 743
21.6. Taking Stock 743
21.7. References and Literature 743
21.8. Exercises 743
Chapter 22. Poverty Traps, Inequality and Financial Markets 745
22.1. Multiple Equilibria From Aggregate Demand Externalities 745
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22.2. Human Capital Accumulation with Imperfect Capital Markets 754
22.3. Income Inequality and Economic Development 761
22.4. Financial Development and Economic Growth 761
22.5. Taking Stock 761
22.6. References and Literature 761
22.7. Exercises 761
Chapter 23. Population Growth and the Demographic Transition 763
23.1. Patterns of Demographic Changes 763
23.2. Population and Growth: Different Perspectives 763
23.3. A Simple Model of Demographic Transition 763
23.4. Exercises 763
Part 8. Political Economy of Growth 765
Chapter 24. Institutions and Growth 767
24.1. The Impact of Institutions on Long-Run Development 767
Chapter 25. Modeling Non-Growth Enhancing Institutions 777
25.1. Baseline Model 781
25.2. Technology Adoption and Holdup 795
25.3. Inefficient Economic Institutions 798
25.4. Exercises 802
Chapter 26. Modeling Political Institutions 803
26.1. Understanding Endogenous Political Change 803
26.2. Exercises 815
Part 9. Conclusions 817
Chapter 27. Putting It All Together: Mechanics and Causes of Economic
Growth 819
Chapter 28. Areas of Future Research 821
Part 10. Mathematical Appendix 823
Chapter 29. Review of Basic Set Theory 825
29.1. Open, Closed, Convex and Compact Sets 825
29.2. Sequences, Subsequences and Limits 825
29.3. Distance, Norms and Metrics 825
Chapter 30. Functions of Several Variables 827
30.1. Continuous Functions 827
30.2. Convexity, Concavity, Quasi-Concavity 827
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30.3. Taylor Series 827
30.4. Optima and Constrained Optima 827
30.5. Intermediate and Mean Value Theorems 827
30.6. Inverse and Implicit Function Theorems 827
Chapter 31. Review of Ordinary Differential Equations 829
31.1. Review of Complex Numbers 829
31.2. Eigenvalues and Eigenvectors 829
31.3. Linear Differential Equations 829
31.4. Separable Differential Equations 829
31.5. Existence and Uniqueness Theorems 829
References (highly incomplete) 831
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