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Optimal Growth Strategy under Dynamic Threshold
Author(s) -
VAN CUONG LE,
SAĞLAM ÇAĞRı,
TURAN AGAH
Publication year - 2016
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12167
Subject(s) - fixed cost , fixed investment , production (economics) , investment (military) , economics , per capita , incentive , fixed asset , variable cost , microeconomics , fixed effects model , econometrics , panel data , profit (economics) , population , demography , capital formation , sociology , financial capital , politics , political science , law
We consider an economy in which the technology exhibits nonconvexities due to fixed costs associated with production. Taking into account the incentives for investment to decrease fixed costs, we characterize the circumstances under which an underdeveloped economy can catch up with the developing ones. We show that it is optimal to get rid of the fixed costs inherent in production in finite time provided that the initial level of fixed costs are not too high and the technology for reducing fixed costs is sufficiently efficient. Indeed, we obtain that even though the income disparities may be very persistent and can be perceived as poverty traps, economies with not very high initial fixed costs and sufficiently efficient technology for reducing fixed costs would ultimately converge to the same steady state level of per capita income.