Essays on Endogenous Growth

Abstract

This thesis contains three chapters, each a separate essay on endogenous growth.

In Chapter 1, we compare unfunded social security with reform-favored compulsory individual savings in an endogenous growth model with heterogeneous accidental bequests and public schooling and without annuity markets. We show that compulsory individual savings should be inframarginal and neutral. By contrast, the unfunded scheme improves welfare for workers receiving no bequests, unless the survival rate becomes too high or the taste for old-age consumption is too weak; and it may also promote growth. Because retired agents gain from receiving intergenerational transfers from workers, their joint voice with have-no workers makes it unlikely for compulsory individual savings to win majority support.

Chapter 2 studies the overlapping generation model of a small open economy, adopting an expanding-product-variety framework with two final good sectors, manufacture and service. The variety of intermediate goods increases and generates monopoly profits for R&D firms. We find that when the consumers? tastes for manufacture and service goods are nonhomothetic, the economy is stable and will converge to the steady-state of the homothetic preferences case if the monopoly mark-up is high. When price of service grows slowly, our numerical simulations are consistent with the empirical facts of structural change, such that in the short run and long run, relative price for service goods will increase, the employment and nominal output share of service sector will also increase.

In Chapter 3 we discuss the nonhomothetic tastes of consumers and the structural change using infinite horizon agent model. We also compare our results with the overlapping generation model in Chapter 2. Unlike in Chapter 2, we find that there exists transitional dynamics in the homothetic system of the IH model in order to satisfy the transversality condition. The initial growth rate is determined by the initial endowment as well as the technological level. There are two steady-states in the homothetic system. Depending on the parameter values, one of them is stable and the other is unstable. The nonhomothetic system converges to the stable homothetic steady-state asymptotically. One of homothetic steady-states is empirically more likely to be stable. In such case, a higher initial endowment leads to a higher initial growth rate. When the initial growth rate is lower than the stable steady-state, the employment share and nominal output share of the service sector will increase at the early stages of the transition, which is consistent with Erich?s stylized facts for structural changes.