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Optimal Induced Innovation and Growth with Congestion of a Limited Natural Resource

Tavani, Daniele (2008): Optimal Induced Innovation and Growth with Congestion of a Limited Natural Resource.

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In a simple Neoclassical Growth Model with endogenous technical change, I expand on the hypothesis of Induced Innovation including a production externality from a xed input, called `land', which represents the carrying capacity of the earth's atmosphere. Land is assumed to be congested by the use of labor and capital in production. A market economy where land is free will fail to reach a steady state, and may end up in either of three possible cases: (i) a catastrophe driven by overaccumulation; (ii) a state in which Induced Innovation stops capital deepening but not environmental decline; (iii) a path of perpetual decumulation of capital resembling an industrial counterrevolution. A planned economy, instead, will assign a shadow-price to land, thus setting in motion the Induced Innovation engine and fostering land-augmenting technological progress which will reduce environmental stress. The unique equilibrium if this economy is found to be locally asymptotically stable in the numerical analysis for substitution elasticities smaller than 1. The corresponding direction of technical change is characterized by constant shares of all inputs, a positive growth rate of labor- and land-augmenting technologies, and by a rate of growth of capital-augmentation equal to zero.

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