Daron Book 1.pdf - Introduction to Modern Economic Growth...

Unformatted text preview: Introduction to Modern Economic Growth: Parts 1-5 Daron Acemoglu Department of Economics, Massachusetts Institute of Technology Contents Preface Part 1. xi 1 Introduction Chapter 1. Economic Growth and Economic Development: The Questions 1.1. Cross-Country Income Differences 1.2. Income and Welfare 1.3. Economic Growth and Income Differences 1.4. Origins of Today’s Income Differences and World Economic Growth 1.5. Conditional Convergence 1.6. Correlates of Economic Growth 1.7. From Correlates to Fundamental Causes 1.8. The Agenda 1.9. References and Literature 3 3 6 10 12 16 20 22 25 27 Chapter 2. The Solow Growth Model 2.1. The Economic Environment of the Basic Solow Model 2.2. The Solow Model in Discrete Time 2.3. Transitional Dynamics in the Discrete Time Solow Model 2.4. The Solow Model in Continuous Time 2.5. Transitional Dynamics in the Continuous Time Solow Model 2.6. Solow Model with Technological Progress 2.7. Comparative Dynamics 2.8. Taking Stock 2.9. References and Literature 2.10. Exercises 31 32 40 50 55 59 66 76 78 79 80 Chapter 3. The Solow Model and the Data 3.1. Growth Accounting 3.2. Solow Model and Regression Analyses 3.3. The Solow Model with Human Capital 3.4. Solow Model and Cross-Country Income Differences: Regression Analyses 3.5. Calibrating Productivity Differences 3.6. Estimating Productivity Differences 3.7. Taking Stock 3.8. References and Literature 3.9. Exercises 87 87 90 98 104 113 118 123 125 126 Chapter 4. Fundamental Determinants of Differences in Economic Performance 4.1. Proximate Versus Fundamental Causes 129 129 iii Introduction to Modern Economic Growth 4.2. 4.3. 4.4. 4.5. 4.6. 4.7. 4.8. 4.9. 4.10. Part 2. Economies of Scale, Population, Technology and World Growth The Four Fundamental Causes The Effect of Institutions on Economic Growth What Types of Institutions? Disease and Development Political Economy of Institutions: First Thoughts Taking Stock References and Literature Exercises 133 136 147 164 167 170 171 171 174 177 Towards Neoclassical Growth Chapter 5. Foundations of Neoclassical Growth 5.1. Preliminaries 5.2. The Representative Household 5.3. Infinite Planning Horizon 5.4. The Representative Firm 5.5. Problem Formulation 5.6. Welfare Theorems 5.7. Sketch of the Proof of the Second Welfare Theorem, Theorem 5.7* 5.8. Sequential Trading 5.9. Optimal Growth in Discrete Time 5.10. Optimal Growth in Continuous Time 5.11. Taking Stock 5.12. References and Literature 5.13. Exercises 179 179 182 188 190 192 193 201 203 207 208 209 210 211 Chapter 6. Dynamic Programming and Optimal Growth 6.1. Brief Review of Dynamic Programming 6.2. Dynamic Programming Theorems 6.3. The Contraction Mapping Theorem and Applications* 6.4. Proofs of the Main Dynamic Programming Theorems* 6.5. Fundamentals of Dynamic Programming 6.6. Optimal Growth in Discrete Time 6.7. Competitive Equilibrium Growth 6.8. Taking Stock 6.9. References and Literature 6.10. Exercises 215 216 220 224 229 236 245 250 252 253 254 Chapter 7. Review of the Theory of Optimal Control 7.1. Variational Arguments 7.2. The Maximum Principle: A First Look 7.3. Infinite-Horizon Optimal Control 7.4. More on Transversality Conditions 7.5. Discounted Infinite-Horizon Optimal Control 7.6. Existence of Solutions∗ 7.7. A First Look at Optimal Growth in Continuous Time 7.8. The q-Theory of Investment 7.9. Taking Stock 259 260 268 273 283 285 290 291 292 297 iv Introduction to Modern Economic Growth 7.10. References and Literature 7.11. Exercises Part 3. 299 301 307 Neoclassical Growth Chapter 8. The Neoclassical Growth Model 8.1. Preferences, Technology and Demographics 8.2. Characterization of Equilibrium 8.3. Optimal Growth 8.4. Steady-State Equilibrium 8.5. Transitional Dynamics 8.6. Technological Change and the Canonical Neoclassical Model 8.7. Comparative Dynamics 8.8. The Role of Policy 8.9. A Quantitative Evaluation 8.10. Extensions 8.11. Taking Stock 8.12. References and Literature 8.13. Exercises 309 309 313 317 318 320 323 329 330 332 335 336 337 337 Chapter 9. Growth with Overlapping Generations 9.1. Problems of Infinity 9.2. The Baseline Overlapping Generations Model 9.3. The Canonical Overlapping Generations Model 9.4. Overaccumulation and Pareto Optimality of Competitive Equilibrium in the Overlapping Generations Model 9.5. Role of Social Security in Capital Accumulation 9.6. Overlapping Generations with Impure Altruism 9.7. Overlapping Generations with Perpetual Youth 9.8. Overlapping Generations in Continuous Time 9.9. Taking Stock 9.10. References and Literature 9.11. Exercises 345 346 348 353 355 358 360 364 368 374 376 377 Chapter 10. Human Capital and Economic Growth 10.1. A Simple Separation Theorem 10.2. Schooling Investments and Returns to Education 10.3. The Ben-Porath Model 10.4. Neoclassical Growth with Physical and Human Capital 10.5. Capital-Skill Complementarity in an Overlapping Generations Model 10.6. Physical and Human Capital with Imperfect Labor Markets 10.7. Human Capital Externalities 10.8. Nelson-Phelps Model of Human Capital 10.9. Taking Stock 10.10. References and Literature 10.11. Exercises 383 383 386 387 392 397 401 406 408 411 413 414 Chapter 11. First-Generation Models of Endogenous Growth 11.1. The AK Model Revisited 11.2. The AK Model with Physical and Human Capital 417 418 424 v Introduction to Modern Economic Growth 11.3. 11.4. 11.5. 11.6. 11.7. Part 4. The Two-Sector AK Model Growth with Externalities Taking Stock References and Literature Exercises 426 430 434 435 436 Endogenous Technological Change 443 Chapter 12.1. 12.2. 12.3. 12.4. 12.5. 12.6. 12.7. 12.8. 12. Modeling Technological Change Different Conceptions of Technology Science and Profits The Value of Innovation in Partial Equilibrium The Dixit-Stiglitz Model and “Aggregate Demand Externalities” Individual R&D Uncertainty and the Stock Market Taking Stock References and Literature Exercises 445 445 449 452 459 466 468 468 470 Chapter 13.1. 13.2. 13.3. 13.4. 13.5. 13.6. 13.7. 13. Expanding Variety Models The Lab Equipment Model of Growth with Input Varieties Growth with Knowledge Spillovers Growth without Scale Effects Growth with Expanding Product Varieties Taking Stock References and Literature Exercises 473 473 485 488 491 495 496 497 Chapter 14.1. 14.2. 14.3. 14.4. 14.5. 14.6. 14.7. 14. Models of Schumpeterian Growth 505 A Baseline Model of Schumpeterian Growth 506 A One-Sector Schumpeterian Growth Model 517 Innovation by Incumbents and Entrants and Sources of Productivity Growth 522 Step-by-Step Innovations* 539 Taking Stock 552 References and Literature 553 Exercises 555 Chapter 15. Directed Technological Change 15.1. Importance of Biased Technological Change 15.2. Basics and Definitions 15.3. Baseline Model of Directed Technological Change 15.4. Directed Technological Change with Knowledge Spillovers 15.5. Directed Technological Change without Scale Effects 15.6. Endogenous Labor-Augmenting Technological Change 15.7. Generalizations and Other Applications 15.8. An Alternative Approach to Labor-Augmenting Technological Change 15.9. Taking Stock 15.10. References and Literature 15.11. Exercises 563 564 567 570 585 589 591 594 595 600 602 604 Part 5. 611 Stochastic Growth vi Introduction to Modern Economic Growth Chapter 16.1. 16.2. 16.3. 16.4. 16.5. 16.6. 16.7. 16.8. 16. Stochastic Dynamic Programming Dynamic Programming with Expectations Proofs of the Stochastic Dynamic Programming Theorems* Stochastic Euler Equations Generalization to Markov Processes* Applications of Stochastic Dynamic Programming Taking Stock References and Literature Exercises 613 613 621 626 629 631 639 640 641 Chapter 17.1. 17.2. 17.3. 17.4. 17.5. 17.6. 17.7. 17.8. 17.9. 17. Stochastic Growth Models The Brock-Mirman Model Equilibrium Growth under Uncertainty Application: Real Business Cycle Models Growth with Incomplete Markets: The Bewley Model The Overlapping Generations Model with Uncertainty Risk, Diversification and Growth Taking Stock References and Literature Exercises 645 646 651 659 663 667 670 689 690 691 Part 6. Chapter 18.1. 18.2. 18.3. 18.4. 18.5. 18.6. 18.7. 18.8. Technology Diffusion, Trade and Interdependences 18. Diffusion of Technology Productivity Differences and Technology A Benchmark Model of Technology Diffusion Technology Diffusion and Endogenous Growth Appropriate and Inappropriate Technologies and Productivity Differences Contracting Institutions and Technology Adoption Taking Stock References and Literature Exercises 697 701 701 704 713 718 727 741 744 745 Chapter 19. Trade and Growth 19.1. Growth and Financial Capital Flows 19.2. Why Doesn’t Capital Flow from Rich to Poor Countries? 19.3. Economic Growth in a Heckscher-Ohlin World 19.4. Trade, Specialization and the World Income Distribution 19.5. Trade, Technology Diffusion and the Product Cycle 19.6. Trade and Endogenous Technological Change 19.7. Learning-by-Doing, Trade and Growth 19.8. Taking Stock 19.9. References and Literature 19.10. Exercises 751 751 757 760 770 784 789 792 796 799 801 Part 7. 807 Economic Development and Economic Growth Chapter 20. Structural Change and Economic Growth 20.1. Non-Balanced Growth: The Demand Side 20.2. Non-Balanced Growth: The Supply Side vii 813 813 821 Introduction to Modern Economic Growth 20.3. 20.4. 20.5. 20.6. Agricultural Productivity and Industrialization Taking Stock References and Literature Exercises 835 841 843 844 Chapter 21. Structural Transformations and Market Failures in Development 21.1. Financial Development 21.2. Fertility, Mortality and the Demographic Transition 21.3. Migration, Urbanization and The Dual Economy 21.4. Distance to the Frontier and Changes in the Organization of Production 21.5. Multiple Equilibria From Aggregate Demand Externalities and the Big Push 21.6. Inequality, Credit Market Imperfections and Human Capital 21.7. Towards a Unified Theory of Development and Growth? 21.8. Taking Stock 21.9. References and Literature 21.10. Exercises 849 851 857 865 876 886 894 907 912 913 916 Part 8. 925 Political Economy of Growth Chapter 22.1. 22.2. 22.3. 22.4. 22.5. 22.6. 22.7. 22. Institutions, Political Economy and Growth 931 The Impact of Institutions on Long-Run Development 932 Distributional Conflict and Economic Growth in a Simple Society 938 Distributional Conflict and Competition 951 Inefficient Economic Institutions: A First Pass 964 Distributional Conflict and Economic Growth: Concave Preferences* 969 Heterogeneous Preferences, Social Choice and the Median Voter* 975 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 23.1. 23.2. 23.3. 23.4. 23.5. 23.6. 23.7. 23.8. 23. Political Institutions and Economic Growth Political Regimes and Economic Growth Political Institutions and Growth-Enhancing Policies Dynamic Tradeoffs Understanding Endogenous Political Change Dynamics of Political and Economic Institutions: A First Look Taking Stock References and Literature Exercises 1023 1024 1029 1034 1057 1069 1086 1089 1090 Chapter 24.1. 24.2. 24.3. 24. Epilogue: Mechanics and Causes of Economic Growth What Have We Learned? A Possible Perspective on Growth and Stagnation over the Past 200 Years Many Remaining Questions 1095 1095 1100 1111 Part 9. 1115 Mathematical Appendices viii Introduction to Modern Economic Growth Chapter A.1. A.2. A.3. A.4. A.5. A.6. A.7. A.8. A.9. A.10. A.11. A. Odds and Ends in Real Analysis and Applications to Optimization 1117 Distances and Metric Spaces 1118 Mappings, Functions, Sequences, and Continuity 1121 A Minimal Amount of Topology: Continuity and Compactness 1126 The Product Topology 1131 Correspondences and Berge’s Maximum Theorem 1134 Convexity, Concavity, Quasi-Concavity and Fixed Points 1138 Differentiation, Taylor Series and the Mean Value Theorem 1142 Functions of Several Variables and the Inverse and Implicit Function Theorems1145 Separation Theorems 1149 Constrained Optimization 1153 Exercises 1156 Chapter B. Review of Ordinary Differential Equations B.1. Review of Eigenvalues and Eigenvectors B.2. Some Basic Results on Integrals B.3. Linear Differential Equations B.4. Stability for Nonlinear Differential Equations B.5. Separable and Exact Differential Equations B.6. Existence and Uniqueness of Solutions B.7. Continuity of Solutions B.8. Difference Equations B.9. Exercises 1161 1161 1162 1164 1170 1171 1173 1174 1175 1177 Chapter C.1. C.2. C.3. C.4. 1179 1179 1183 1187 1189 C. Brief Review of Dynamic Games Basic Definitions Some Basic Results Application: Repeated Games With Perfect Observability Exercises Chapter D. List of Theorems Chapter 2 Chapter 5 Chapter 6 Chapter 7 Chapter 10 Chapter 16 Chapter 22 Appendix Chapter A Appendix Chapter B Appendix Chapter C 1191 1191 1191 1191 1192 1192 1193 1193 1193 1194 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 that to understand why some countries grow and some fail to do so, economists have 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 commented 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 introduction to this core material of modern macroeconomics. Although there are several good graduate-level macroeconomic textbooks, they typically spend relatively little time on the basic core material and do not develop the links between modern macroeconomic 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 shortrun 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 Introduction to Modern Economic Growth Chapters 5-7 provide the conceptual and mathematical foundations of modern macroeconomic analysis. Chapter 5 provides the microfoundations for much of the rest of the book (and for much of modern macroeconomics), while Chapters 6 and 7 provide a quick but relatively rigorous introduction to dynamic optimization. Most books on macroeconomics or economic growth use either continuous time or discrete time exclusively. I believe that a serious study of both economic growth and modern macroeconomics requires the student (and the researcher) to be able to go between discrete and continuous time and choose whichever one is more convenient or appropriate for the set of questions at hand. Therefore, I have deviated from this standard practice and included both continuous time and discrete time material throughout the book. Chapters 2, 8, 9 and 10 introduce the basic workhorse models of modern macroeconomics and traditional economic growth, while Chapter 11 presents the first generation models of sustained (endogenous) economic growth. Chapters 12-15 cover models of technological progress, which are an essential part of any modern economic growth course. Chapter 16 generalizes the tools introduced in Chapter 6 to stochastic environments. Using these tools, Chapter 17 presents a number of models of stochastic growth, most notably, the neoclassical growth model under uncertainty, which is the foundation of much of modern macroeconomics (though it is often left out of economic growth courses). The canonical Real Business Cycle model is presented as an application. This chapter also covers another major workhorse model of modern macroeconomics, the incomplete markets model of Bewley. Finally, this chapter also presents a number of other approaches to modeling the interaction between incomplete markets and economic growth and shows how models of stochastic growth can be useful in understanding how economies transition from stagnation or slow growth to an equilibrium with sustained growth. Chapters 18-21 cover a range of topics that are sometimes left out of economic growth textbooks. These include models of technology adoption, technology diffusion, the interaction between international trade and technology, the process of structural change, the demographic transition, the possibility of poverty traps, the effects of inequality on economic growth and the interaction between financial and economic development. These topics are important for creating a bridge between the empirical patterns we observe in practice and the theory. Most traditional growth models consider a single economy in isolation and often after it has already embarked upon a process of steady economic growth. A study of models that incorporate cross-country interdependences, structural change and the possibility of takeoffs will enable us to link core topics of development economics, such as structural change, poverty traps or the demographic transition, to the theory of economic growth. Finally, Chapters 22 and 23 consider another topic often omitted from macroeconomics and economic growth textbooks; political economy. This is motivated by the belief that the study of economic growth would be seriously hampered if we failed to ask questions about the fundamental causes of why countries differ in their economic performances. These questions invariably bring us to differences in economic policies and institutions across nations. Political economy enables us to develop models to understand why economic policies and institutions differ across countries and must therefore be an integral part of the study of economic growth. A few words on the philosophy and organization of the book might also be useful for students and teachers. The underlying philosophy of the book is that all the results that are stated should be proved or at least explained in detail. This implies a somewhat different organiz...
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