nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2016‒04‒30
two papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. Life-Cycle Saving, Bequests, and the Role of Population in R&D-based Growth By Bharat Diwakar; Gilad Sorek
  2. Unemployment and Innovation By Joseph Stiglitz

  1. By: Bharat Diwakar; Gilad Sorek
    Abstract: This study shows how the two alternative saving motives, life-cycle consumption smoothing and parental bequests, determine the relation between population growth and R&D-based economic growth, i.e. the sign of the "weak scale-effect". We take a textbook R&D-based growth model of infinitely living agents with no weak-scale effect, and analyze it in an Overlapping Generations framework - with and without bequest saving-motive. We show how the different saving motives determine the relation between population growth and per-capita income growth, which proves to be ambiguous in general, and may also be non-monotonic. Hence, we conclude that the counterfactual weak-scale effect that is present in the second and third generations of R&D-based growth models of infinitely-living agents depends on their specific demographic structure, and thus is not inherent to R&D-based growth theory itself.
    Keywords: R&D-based Growth, Weak Scale Effect, Overlapping Generations
    JEL: O31 O40
    Date: 2016–03
  2. By: Joseph Stiglitz (Columbia University)
    Abstract: This paper analyzes equilibrium, dynamics, and optimal decisions on the factor bias of innovation in a model of induced innovation. In a model with full employment, we show that (a) if the elasticity of substitution is always less than or greater than unity, there is a unique steady state equilibrium; (b) if the elasticity of substitution is less than unity, the steady state is stable, but convergence is oscillatory; (c) if the elasticity of substitution is greater than unity, the steady state is a saddle point; and (d) if the elasticity of substitution is less than unity for both high and low effective capital labor ratios but greater than unity for intermediate values, then there can be multiple steady states. In a model where efficiency wages lead to equilibrium unemployment, we show that if the elasticity of substitution is less than unity, there will be a bias towards excessive labor augmenting innovation, resulting in too high unemployment, with convergence to the unique steady state being oscillatory, rather than monotonic. Similarly, if the elasticity of substitution between skilled and unskilled labor is less than unity, and there is efficiency wage unemployment for unskilled labor only, there is will be excessively skill-biased innovation. This paper provides an alternative resolution to the Harrod-Domar conundrum of the disparity between the natural and warranted rate of growth to that of Solow, with strong policy implications, for instance, concerning the effects of income distribution and monetary policy both in the short run and the long.
    JEL: E24 O30 O31 O33
    Date: 2015–01

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