Papers in Modern Economic Growth Theory

Abstract

This thesis seeks to develop our understanding of two emerging themes in economic growth theory: constrained optima in heterogeneous agent economies with non- trivial wealth distributions, and the relationship between energy use and long-run growth.

The first paper proves the existence of constrained optima in a growth model with incomplete insurance markets and idiosyncratic risk, also known as the Aiyagari- Huggett model. A natural way to formulate an optimal policy problem in the Aiyagari-Huggett model is by using a constrained planner; the constrained plan- ner cannot complete markets, but must improve welfare subject to agents’ budget constraints. Because the planner must respect infinitely many agents’ idiosyncratic budget constraints, the state and control for the constrained planner are an infinite dimensional wealth distribution and policy function. The key mathematical chal- lenge the proof overcomes is non-compactness of feasibility correspondences in the constrained planner’s dynamic optimization problem, brought on by the infinite dimensional structure of the economy.

The second paper computes constrained optima in an Aiyagari-Huggett model with labor-leisure choice. In an economy calibrated to U.S. wealth and income inequality, the paper finds the constrained planner increases aggregate capital and reduces aggregate hours worked. The resulting increase in wages and fall in interest rates shifts the distribution of consumption towards the consumption poor, since they rely more on labor income than capital income. However, in a constrained efficient allocation, only highly productive individuals increase saving, while less productive individuals reduce saving. Moreover, only the asset poor and less productive agents reduce work hours; the wealthy and highly productive increase work hours due to wealth effects. While total work hours fall, the increase in work hours by the most productive is sufficient to increase effective labor supply.

The third paper turns to energy and growth. World and U.S. energy intensities have declined over the past century, falling, on average, approximately 1.2–1.5 percent a year. The decline has persisted through periods of non-increasing raw energy prices, suggesting the decline is in a large part driven by autonomous factors, inde- pendent of price changes. In this paper I use a model of Schumpetarian endogenous growth with directed technical change to understand the autonomous decline in energy intensity and consider if the decline will continue. In an economy with no state dependence, where existing knowledge does not make R&D more profitable, this paper shows that energy intensity continues to decline from profit driven energy augmenting innovation, albeit at a slower rate than output growth. In an economy with state dependence, however, energy intensity eventually stops declining because labor augmenting innovation crowds out energy augmenting innovation. In either case, energy use always increases as long as the raw price of energy stays constant. Show more