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The Implications of Alternative Saving and Expectations Hypotheses for Choices of Technique and Patterns of Growth

Stiglitz, Joseph E.; Cass, David

The purpose of this paper is to investigate in detail the dynamics of a simple model with heterogeneous capital goods under alternative assumptions about expectations formation and saving. Before investment takes place, the entrepreneur has a choice over a large number (to be precise, a continuum) of types of machines; those which require more resources today require less labor per unit of output in the future. But once the machine has been constructed, it cannot be altered. This model raises, moreover, the interesting problem of economic obsolescence: machines may be constructed which subsequently, because of higher wage rates, are no longer profitable to operate. We shall be interested in determining how the dynamic behavior of this economy differs from that of the economy with malleable capital, as analyzed by Solow (1956) and Swan (1956) for the descriptive growth model and by Ramsey (1928) for the optimal growth model. It will be shown that, although there are fundamental differences in short-run behavior, in the long run the economy evolves much like the economy described by the simpler malleable capital models. On the other hand, econometric estimation based on the use of the malleable capital model, such as that of Solow (1957) in estimating the residual, or Arrow, Chenery, Minhas, and Solow (1961) in estimating the elasticity of substitution, may encounter serious biases from the specification error.

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Journal of Political Economy

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Business
Published Here
July 9, 2012
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