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The dynamic efficiency of the Ramsey model with endogenous labour participation rate
Author(s) -
Faria João Ricardo
Publication year - 2001
Publication title -
optimal control applications and methods
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 44
eISSN - 1099-1514
pISSN - 0143-2087
DOI - 10.1002/oca.686
Subject(s) - economics , depreciation (economics) , consumption (sociology) , wage rate , productivity , capital (architecture) , microeconomics , labour economics , substitution (logic) , marginal utility , marginal product , labour supply , time preference , preference , wage , production (economics) , macroeconomics , capital formation , profit (economics) , history , social science , archaeology , sociology , financial capital , computer science , programming language
This paper incorporates the hypothesis of labour participation rate into the Ramsey model. It is shown that the economy can be dynamically inefficient if the average productivity of capital is greater than the sum of the rate of time preference, the population growth rate, the depreciation rate and the marginal rate of substitution between labour and consumption. The modified golden rule holds when the wage rate is equal to the marginal rate of substitution between labour and consumption. However, there is no guarantee that it will happen, since labour supply is driven by capital allocation decisions. Copyright © 2001 John Wiley & Sons, Ltd.