Simone Valente

Hicks meets Hotelling: the direction of technical change in capital-resource economies

We analyze a two-sector growth model with directed technical change where man-made capital and exhaustible resources are essential for production. The relative profitability of factor-specific innovations endogenously determines whether technical progress will be capital- or resource-augmenting. We show that any balanced growth equilibrium features purely resource-augmenting technical change. This result is compatible with alternative specifications of preferences and innovation technologies, as it hinges on the interplay between productive efficiency in the final sector, and the Hotelling rule characterizing the efficient depletion path for the exhaustible resource. Our result provides sound micro-foundations for the broad class of models of exogenous/endogenous growth where resource-augmenting progress is required to sustain consumption in the long run, contradicting the view that these models are conceptually biased in favor of sustainability.

Sustainable Development, Renewable Resources and Technological Progress

Conflicts between optimality and sustainability are typical in the literature on sustainable development. Using the “capital-resource” growth model, Pezzey and Withagen (1998, Scandinavian Journal of Economics100 (2), 513–527) have proved that if natural resources are exhaustible, the time-path of consumption is single-peaked, declining from some point in time onwards. This paper extends the model to include technical progress, resource renewability, extraction costs and population growth. The main result is that, for any constant returns to scale technology, optimal paths can be sustainable only if the social discount rate does not exceed the sum of the rates of resource regeneration and augmentation. The development of resource-saving techniques is crucial for sustaining consumption per capita in the long run, whereas capital depreciation and extraction costs are neutral with respect to this sustainability condition.

Climate Change and Uneven Development

In this paper, using a theoretical model with endogenous capital depreciation, we study the effects of climate change and adaptation on long-run development. We show that climate change affects economic growth depending on climate exposure and adaptation efficiency, which are asymmetric between different countries. Poor countries are likely to be hurt more, because of the negative effects of climate change on the rate of depreciation of the assets that represent the engine of growth. These asymmetries generally induce growth deficits and unsustainability traps in less-developed economies.

Growth on a Finite Planet: Resources, Technology, and Population in the Long Run

We study the interactions between technological change, resource scarcity and population dynamics in a Schumpeterian model with endogenous fertility. There exists a pseudo-Malthusian equilibrium in which population is constant and income grows exponentially: the equilibrium population level is determined by resource scarcity but is independent of technology. The stability properties are driven by (i) the income reaction to increased resource scarcity and (ii) the fertility response to income dynamics. If labor and resources are substitutes in production, income and fertility dynamics are self-balancing and the pseudo-Malthusian equilibrium is the global attractor of the system. If labor and resources are complements, income and fertility dynamics are self-reinforcing and drive the economy towards either demographic explosion or human extinction. Introducing a minimum resource requirement, we obtain a second steady state implying constant population even under complementarity. The standard result of exponential population growth appears as a rather special case of our model.

Endogenous Growth, Backstop Technology Adoption and Optimal Jumps

We study a two-phase endogenous growth model in which the adoption of a backstop technology (e.g. solar) yields a sustained supply of essential energy inputs previously obtained from exhaustible resources (e.g. oil). Growth is knowledge-driven and the optimal timing of technology switching is determined by welfare maximization. The optimal path exhibits discrete jumps in endogenous variables: technology switching implies sudden reductions in consumption and output, an increase in the growth rate, and instantaneous adjustments in saving rates. Due to the positive growth effect, it is optimal to implement the new technology when its current consumption benefits are substantially lower than those generated by old technologies.

Endogenous Growth, Asymmetric Trade and Resource Taxation

Since 1980, the aggregate income of oil-exporting countries relative to that of oil- poor countries has been remarkably constant despite structural gaps in productivity growth rates. This stylized fact is analyzed in a two-country model where resource- poor (Home) and resource-rich (Foreign) economies display productivity differences but stable income shares due to terms-of-trade dynamics. We show that Homes income share is positively related to the national tax on domestic resource use, a prediction confirmed by dynamic panel estimations for sixteen oil-poor economies. National governments have incentives to deviate from both efficient and laissez-faire allocations. In Home, increasing the oil tax improves welfare through a rent-transfer mechanism. In Foreign, subsidies (taxes) on domestic oil use improve welfare if R&D productivity is lower (higher) than in Home.

International Status Seeking, Trade, and Growth Leadership

This paper formalizes international status seeking in a two-country model of endogenous growth: utility of agents in developing countries is affected by consumption gaps with advanced economies. By distorting intertemporal choices, envy tends to revert growth differentials in favor of the developing country when traded goods are substitutes. Notably, asymmetric preferences with endogenous status desire generate (i) convergence in growth rates in the presence of structural gaps, and (ii) convergence in income levels, if productivity differences are absorbed by technology diffusion. This process is driven by declining terms of trade and faster capital accumulation of the status seeker. A calibration exercise shows that the model predictions are consistent with the stylized facts that characterized the growth performance of East Asian economies.

International status seeking, trade, and growth leadership: International status seeking

We study a two-country endogenous growth model where the utility of agents in developing countries is affected by consumption gaps with advanced economies. International status seeking tends to revert growth differentials in favour of the developing country. Preferences with endogenous status desire generate convergence in growth rates in the presence of structural gaps and convergence in income levels if productivity differences disappear. This process is driven by declining terms of trade and faster capital accumulation of the status seeker. The model predictions are shown to be consistent with the stylized facts that characterized the growth performance of East Asian economies.

Habit Formation, Dynastic Altruism, and Population Dynamics

We study the general equilibrium properties of two growth models with overlapping generations, habit formation, and endogenous fertility. In the neoclassical model, habits modify the economys growth rate and generate transitional dynamics in fertility; stationary income per capita is associated with either increasing or decreasing population and output, depending on the strength of habits. In the AK specification, growing population and increasing consumption per capita require that the habit coefficient lie within definite boundaries; outside the critical interval, positive growth is associated with either declining consumption due to overcrowding, or extinction paths with declining population. In both frameworks, habits reduce fertility: the trade-off between second-period consumption and spending for bequests prompts agents to decrease fertility in order to make parental altruism less costly. This mechanism suggests that status-dependent preferences may explain part of the decline in fertility rates observed in most developed economies.

Optimal Growth, Genuine Savings and Long-Run Dynamics

Green accounting theories have shown that negative genuine savings at some point in time imply unsustainability. Consequently, recent studies advocate the use of the genuine savings measure for empirical testing: a negative index implies that sustainability be rejected. However, this criterion cannot ascertain sustainability, because positive current genuine savings do not rule out genuine dissaving in the future. This paper derives a one-to-one relationship between the sign of long-run genuine savings and the limiting condition for sustained utility in the capital-resource growth model, assuming technical progress and resource renewability. This result suggests to extend the genuine saving method to include a test of the limiting condition: if this condition is empirically rejected, positive current genuine savings are delivering a false message.