Table Of Content

Introduction to Modern Economic Growth: Parts 1-5 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 6 1.3. Economic Growth and Income Differences 10 1.4. Origins of Today’s Income Differences and World Economic Growth 12 1.5. Conditional Convergence 16 1.6. Correlates of Economic Growth 20 1.7. From Correlates to Fundamental Causes 22 1.8. The Agenda 25 1.9. References and Literature 27 Chapter 2. The Solow Growth Model 31 2.1. The Economic Environment of the Basic Solow Model 32 2.2. The Solow Model in Discrete Time 40 2.3. Transitional Dynamics in the Discrete Time Solow Model 50 2.4. The Solow Model in Continuous Time 55 2.5. Transitional Dynamics in the Continuous Time Solow Model 59 2.6. Solow Model with Technological Progress 66 2.7. Comparative Dynamics 76 2.8. Taking Stock 78 2.9. References and Literature 79 2.10. Exercises 80 Chapter 3. The Solow Model and the Data 87 3.1. Growth Accounting 87 3.2. Solow Model and Regression Analyses 90 3.3. The Solow Model with Human Capital 98 3.4. Solow Model and Cross-Country Income Differences: Regression Analyses 104 3.5. Calibrating Productivity Differences 113 3.6. Estimating Productivity Differences 118 3.7. Taking Stock 123 3.8. References and Literature 125 3.9. Exercises 126 Chapter 4. Fundamental Determinants of Differences in Economic Performance 129 4.1. Proximate Versus Fundamental Causes 129 iii Introduction to Modern Economic Growth 4.2. Economies of Scale, Population, Technology and World Growth 133 4.3. The Four Fundamental Causes 136 4.4. The Effect of Institutions on Economic Growth 147 4.5. What Types of Institutions? 164 4.6. Disease and Development 167 4.7. Political Economy of Institutions: First Thoughts 170 4.8. Taking Stock 171 4.9. References and Literature 171 4.10. Exercises 174 Part 2. Towards Neoclassical Growth 177 Chapter 5. Foundations of Neoclassical Growth 179 5.1. Preliminaries 179 5.2. The Representative Household 182 5.3. Infinite Planning Horizon 188 5.4. The Representative Firm 190 5.5. Problem Formulation 192 5.6. Welfare Theorems 193 5.7. Sketch of the Proof of the Second Welfare Theorem, Theorem 5.7* 201 5.8. Sequential Trading 203 5.9. Optimal Growth in Discrete Time 207 5.10. Optimal Growth in Continuous Time 208 5.11. Taking Stock 209 5.12. References and Literature 210 5.13. Exercises 211 Chapter 6. Dynamic Programming and Optimal Growth 215 6.1. Brief Review of Dynamic Programming 216 6.2. Dynamic Programming Theorems 220 6.3. The Contraction Mapping Theorem and Applications* 224 6.4. Proofs of the Main Dynamic Programming Theorems* 229 6.5. Fundamentals of Dynamic Programming 236 6.6. Optimal Growth in Discrete Time 245 6.7. Competitive Equilibrium Growth 250 6.8. Taking Stock 252 6.9. References and Literature 253 6.10. Exercises 254 Chapter 7. Review of the Theory of Optimal Control 259 7.1. Variational Arguments 260 7.2. The Maximum Principle: A First Look 268 7.3. Infinite-Horizon Optimal Control 273 7.4. More on Transversality Conditions 283 7.5. Discounted Infinite-Horizon Optimal Control 285 7.6. Existence of Solutions 290 ∗ 7.7. A First Look at Optimal Growth in Continuous Time 291 7.8. The q-Theory of Investment 292 7.9. Taking Stock 297 iv Introduction to Modern Economic Growth 7.10. References and Literature 299 7.11. Exercises 301 Part 3. Neoclassical Growth 307 Chapter 8. The Neoclassical Growth Model 309 8.1. Preferences, Technology and Demographics 309 8.2. Characterization of Equilibrium 313 8.3. Optimal Growth 317 8.4. Steady-State Equilibrium 318 8.5. Transitional Dynamics 320 8.6. Technological Change and the Canonical Neoclassical Model 323 8.7. Comparative Dynamics 329 8.8. The Role of Policy 330 8.9. A Quantitative Evaluation 332 8.10. Extensions 335 8.11. Taking Stock 336 8.12. References and Literature 337 8.13. Exercises 337 Chapter 9. Growth with Overlapping Generations 345 9.1. Problems of Infinity 346 9.2. The Baseline Overlapping Generations Model 348 9.3. The Canonical Overlapping Generations Model 353 9.4. Overaccumulation and Pareto Optimality of Competitive Equilibrium in the Overlapping Generations Model 355 9.5. Role of Social Security in Capital Accumulation 358 9.6. Overlapping Generations with Impure Altruism 360 9.7. Overlapping Generations with Perpetual Youth 364 9.8. Overlapping Generations in Continuous Time 368 9.9. Taking Stock 374 9.10. References and Literature 376 9.11. Exercises 377 Chapter 10. Human Capital and Economic Growth 383 10.1. A Simple Separation Theorem 383 10.2. Schooling Investments and Returns to Education 386 10.3. The Ben-Porath Model 387 10.4. Neoclassical Growth with Physical and Human Capital 392 10.5. Capital-Skill Complementarity in an Overlapping Generations Model 397 10.6. Physical and Human Capital with Imperfect Labor Markets 401 10.7. Human Capital Externalities 406 10.8. Nelson-Phelps Model of Human Capital 408 10.9. Taking Stock 411 10.10. References and Literature 413 10.11. Exercises 414 Chapter 11. First-Generation Models of Endogenous Growth 417 11.1. The AK Model Revisited 418 11.2. The AK Model with Physical and Human Capital 424 v Introduction to Modern Economic Growth 11.3. The Two-Sector AK Model 426 11.4. Growth with Externalities 430 11.5. Taking Stock 434 11.6. References and Literature 435 11.7. Exercises 436 Part 4. Endogenous Technological Change 443 Chapter 12. Modeling Technological Change 445 12.1. Different Conceptions of Technology 445 12.2. Science and Profits 449 12.3. The Value of Innovation in Partial Equilibrium 452 12.4. The Dixit-Stiglitz Model and “Aggregate Demand Externalities” 459 12.5. Individual R&D Uncertainty and the Stock Market 466 12.6. Taking Stock 468 12.7. References and Literature 468 12.8. Exercises 470 Chapter 13. Expanding Variety Models 473 13.1. The Lab Equipment Model of Growth with Input Varieties 473 13.2. Growth with Knowledge Spillovers 485 13.3. Growth without Scale Effects 488 13.4. Growth with Expanding Product Varieties 491 13.5. Taking Stock 495 13.6. References and Literature 496 13.7. Exercises 497 Chapter 14. Models of Schumpeterian Growth 505 14.1. A Baseline Model of Schumpeterian Growth 506 14.2. A One-Sector Schumpeterian Growth Model 517 14.3. Innovation by Incumbents and Entrants and Sources of Productivity Growth 522 14.4. Step-by-Step Innovations* 539 14.5. Taking Stock 552 14.6. References and Literature 553 14.7. Exercises 555 Chapter 15. Directed Technological Change 563 15.1. Importance of Biased Technological Change 564 15.2. Basics and Definitions 567 15.3. Baseline Model of Directed Technological Change 570 15.4. Directed Technological Change with Knowledge Spillovers 585 15.5. Directed Technological Change without Scale Effects 589 15.6. Endogenous Labor-Augmenting Technological Change 591 15.7. Generalizations and Other Applications 594 15.8. An Alternative Approach to Labor-Augmenting Technological Change 595 15.9. Taking Stock 600 15.10. References and Literature 602 15.11. Exercises 604 Part 5. Stochastic Growth 611 vi Introduction to Modern Economic Growth Chapter 16. Stochastic Dynamic Programming 613 16.1. Dynamic Programming with Expectations 613 16.2. Proofs of the Stochastic Dynamic Programming Theorems* 621 16.3. Stochastic Euler Equations 626 16.4. Generalization to Markov Processes* 629 16.5. Applications of Stochastic Dynamic Programming 631 16.6. Taking Stock 639 16.7. References and Literature 640 16.8. Exercises 641 Chapter 17. Stochastic Growth Models 645 17.1. The Brock-Mirman Model 646 17.2. Equilibrium Growth under Uncertainty 651 17.3. Application: Real Business Cycle Models 659 17.4. Growth with Incomplete Markets: The Bewley Model 663 17.5. The Overlapping Generations Model with Uncertainty 667 17.6. Risk, Diversification and Growth 670 17.7. Taking Stock 689 17.8. References and Literature 690 17.9. Exercises 691 Part 6. Technology Diffusion, Trade and Interdependences 697 Chapter 18. Diffusion of Technology 701 18.1. Productivity Differences and Technology 701 18.2. A Benchmark Model of Technology Diffusion 704 18.3. Technology Diffusion and Endogenous Growth 713 18.4. Appropriate and Inappropriate Technologies and Productivity Differences 718 18.5. Contracting Institutions and Technology Adoption 727 18.6. Taking Stock 741 18.7. References and Literature 744 18.8. Exercises 745 Chapter 19. Trade and Growth 751 19.1. Growth and Financial Capital Flows 751 19.2. Why Doesn’t Capital Flow from Rich to Poor Countries? 757 19.3. Economic Growth in a Heckscher-Ohlin World 760 19.4. Trade, Specialization and the World Income Distribution 770 19.5. Trade, Technology Diffusion and the Product Cycle 784 19.6. Trade and Endogenous Technological Change 789 19.7. Learning-by-Doing, Trade and Growth 792 19.8. Taking Stock 796 19.9. References and Literature 799 19.10. Exercises 801 Part 7. Economic Development and Economic Growth 807 Chapter 20. Structural Change and Economic Growth 813 20.1. Non-Balanced Growth: The Demand Side 813 20.2. Non-Balanced Growth: The Supply Side 821 vii Introduction to Modern Economic Growth 20.3. Agricultural Productivity and Industrialization 835 20.4. Taking Stock 841 20.5. References and Literature 843 20.6. Exercises 844 Chapter 21. Structural Transformations and Market Failures in Development 849 21.1. Financial Development 851 21.2. Fertility, Mortality and the Demographic Transition 857 21.3. Migration, Urbanization and The Dual Economy 865 21.4. Distance to the Frontier and Changes in the Organization of Production 876 21.5. Multiple Equilibria From Aggregate Demand Externalities and the Big Push 886 21.6. Inequality, Credit Market Imperfections and Human Capital 894 21.7. Towards a Unified Theory of Development and Growth? 907 21.8. Taking Stock 912 21.9. References and Literature 913 21.10. Exercises 916 Part 8. Political Economy of Growth 925 Chapter 22. Institutions, Political Economy and Growth 931 22.1. The Impact of Institutions on Long-Run Development 932 22.2. Distributional Conflict and Economic Growth in a Simple Society 938 22.3. Distributional Conflict and Competition 951 22.4. Inefficient Economic Institutions: A First Pass 964 22.5. Distributional Conflict and Economic Growth: Concave Preferences* 969 22.6. Heterogeneous Preferences, Social Choice and the Median Voter* 975 22.7. Distributional Conflict and Economic Growth: Heterogeneity and the Median Voter 995 22.8. The Provision of Public Goods: Weak Versus Strong States 1001 22.9. Taking Stock 1007 22.10. References and Literature 1011 22.11. Exercises 1014 Chapter 23. Political Institutions and Economic Growth 1023 23.1. Political Regimes and Economic Growth 1024 23.2. Political Institutions and Growth-Enhancing Policies 1029 23.3. Dynamic Tradeoffs 1034 23.4. Understanding Endogenous Political Change 1057 23.5. Dynamics of Political and Economic Institutions: A First Look 1069 23.6. Taking Stock 1086 23.7. References and Literature 1089 23.8. Exercises 1090 Chapter 24. Epilogue: Mechanics and Causes of Economic Growth 1095 24.1. What Have We Learned? 1095 24.2. A Possible Perspective on Growth and Stagnation over the Past 200 Years 1100 24.3. Many Remaining Questions 1111 Part 9. Mathematical Appendices 1115 viii Introduction to Modern Economic Growth Chapter A. Odds and Ends in Real Analysis and Applications to Optimization 1117 A.1. Distances and Metric Spaces 1118 A.2. Mappings, Functions, Sequences, and Continuity 1121 A.3. A Minimal Amount of Topology: Continuity and Compactness 1126 A.4. The Product Topology 1131 A.5. Correspondences and Berge’s Maximum Theorem 1134 A.6. Convexity, Concavity, Quasi-Concavity and Fixed Points 1138 A.7. Differentiation, Taylor Series and the Mean Value Theorem 1142 A.8. Functions of Several Variables and the Inverse and Implicit Function Theorems1145 A.9. Separation Theorems 1149 A.10. Constrained Optimization 1153 A.11. Exercises 1156 Chapter B. Review of Ordinary Differential Equations 1161 B.1. Review of Eigenvalues and Eigenvectors 1161 B.2. Some Basic Results on Integrals 1162 B.3. Linear Differential Equations 1164 B.4. Stability for Nonlinear Differential Equations 1170 B.5. Separable and Exact Differential Equations 1171 B.6. Existence and Uniqueness of Solutions 1173 B.7. Continuity of Solutions 1174 B.8. Difference Equations 1175 B.9. Exercises 1177 Chapter C. Brief Review of Dynamic Games 1179 C.1. Basic Definitions 1179 C.2. Some Basic Results 1183 C.3. Application: Repeated Games With Perfect Observability 1187 C.4. Exercises 1189 Chapter D. List of Theorems 1191 Chapter 2 1191 Chapter 5 1191 Chapter 6 1191 Chapter 7 1192 Chapter 10 1192 Chapter 16 1193 Chapter 22 1193 Appendix Chapter A 1193 Appendix Chapter B 1194 Appendix Chapter C 1195 References (incomplete) 1197 ix Preface This book is intended to serve two purposes: (1) First and foremost, this is a book about economic growth and long-run economic development. The process of economic growth and the sources of differences in economic performance across nations are some of the most interesting, important and challenging areas in modern social science. The primary purpose of this book is to introduce graduate students to these major questions and to the theoretical tools necessary for studying them. The book therefore strives to provide students with a strong background in dynamic economic analysis, since only such a background will enable a serious study of economic growth and economic development. It also tries to provide a clear discussion of the broad empirical patterns and historical processes underlying the current state of the world economy. This is motivated by my belief thattounderstandwhysomecountriesgrowandsomefailtodoso, economistshave to move beyond the mechanics of models and pose questions about the fundamental causes of economic growth. (2) In a somewhat different capacity, this book is also a graduate-level introduction to modern macroeconomics and dynamic economic analysis. It is sometimes com- mented that, unlike basic microeconomic theory, there is no core of current macroeconomic theory that is shared by all economists. This is not entirely true. While there is disagreement among macroeconomists about how to approach short-run macroeconomic phenomena and what the boundaries of macroeconomics should be, there is broad agreement about the workhorse models of dynamic macroeconomic analysis. These include the Solow growth model, the neoclassical growth model, the overlapping-generations model and models of technological change and technology adoption. Since these are all models of economic growth, a thorough treatment of modern economic growth can also provide (and perhaps should provide) an intro- ductiontothiscorematerialofmodernmacroeconomics. Althoughthereareseveral good graduate-level macroeconomic textbooks, they typically spend relatively little timeonthebasiccorematerialanddonotdevelopthelinksbetweenmodernmacro- economic analysis and economic dynamics on the one hand and general equilibrium theory on the other. In contrast, the current book does not cover any of the short- run topics in macroeconomics, but provides a thorough and rigorous introduction to what I view to be the core of macroeconomics. Therefore, the second purpose of the book is to provide a first graduate-level course in modern macroeconomics. The selection of topics is designed to strike a balance between the two purposes of the book. Chapters 1, 3 and 4 introduce many of the salient features of the process of economic growth and the sources of cross-country differences in economic performance. Even though these chapters cannot do justice to the large literature on economic growth empirics, they provide a sufficient background for students to appreciate the set of issues that are central to the study of economic growth and also a platform for a further study of this large literature. xi