Table of contents
Preface xi
Part 1. Introduction 1
Chapter 1. Economic Growth and Economic Development:
The Questions 3
1.1. Cross-Country Income Differences 3
1.2. Income and Welfare 6
1.3.
Economic Growth and Income Differences 91.4. Origins of Today’s Income Differences and World Economic Growth 12
1.5. Conditional Convergence 16
1.6. Correlates of Economic Growth 18
1.7. From Correlates to Fundamental Causes 21
1.8. The Agenda 24
1.9. References and Literature 26
Chapter 2. The Solow Growth Model 31
2.1. The Economic Environment of the Basic Solow Model 32
2.2. The Solow Model in Discrete Time 40
2.3. Transitional Dynamics in the Discrete Time Solow Model 50
2.4. The Solow Model in Continuous Time 54
2.5. Transitional Dynamics in the Continuous Time Solow Model 58
2.6. A First Look at Sustained Growth 62
2.7. Solow Model with Technological Progress 63
2.8. Comparative Dynamics 74
2.9. Taking Stock 75
2.10. References and Literature 76
2.11. Exercises 77
Chapter 3. The Solow Model and the Data 83
3.1. Growth Accounting 83
3.2. Solow Model and Regression Analyses 86
3.3. The Solow Model with Human Capital 93
3.4. Solow Model and Cross-Country Income Differences: Regression Analyses 98
3.5. Calibrating Productivity Differences 106
3.6. Estimating Productivity Differences 111
3.7. Taking Stock 116
3.8. References and Literature 118
3.9. Exercises 119
Chapter 4. Fundamental Determinants of Differences in Economic Performance 123
4.1. Proximate Versus Fundamental Causes 123
4.2. Economies of Scale, Population, Technology and World Growth 127
4.3. The Four Fundamental Causes 129
4.4. The Effect of Institutions on Economic Growth 139
4.5. WhatTypesofInstitutions? 153
4.6. Disease and Development 155
4.7. Political Economy of Institutions: First Thoughts 158
4.8.
Taking Stock 1594.9. References and Literature 159
4.10. Exercises 162
Part 2. Towards Neoclassical Growth 165
Chapter 5. Foundations of Neoclassical Growth 167
5.1. Preliminaries 167
5.2. The Representative Household 169
5.3. Infinite Planning Horizon 175
5.4. The Representative Firm 178
5.5. Problem Formulation 180
5.6. Welfare Theorems 181
5.7. Proof of the Second Welfare Theorem, Theorem 5.7* 188
5.8. Sequential Trading 190
5.9. Optimal Growth 194
5.10. Taking Stock 195
5.11. References and Literature 196
5.12. Exercises 197
Chapter 6. Infinite-Horizon Optimization and Dynamic Programming 203
6.1. Discrete-Time Infinite-Horizon Optimization 203
6.2. Introduction to Stationary Dynamic Programming 206
6.3. Stationary Dynamic Programming Theorems 208
6.4. The Contraction Mapping Theorem and Applications* 212
6.5. Proofs of the Main Dynamic Programming Theorems* 217
6.6. Fundamentals of Stationary Dynamic Programming 224
6.7. Nonstationary Infinite-Horizon Optimization 235
6.8. Optimal Growth in Discrete Time 239
6.9. Competitive Equilibrium Growth 244
6.10. Computation 245
6.11. Taking Stock 246
6.12. References and Literature 246
6.13. Exercises 248
Chapter 7. Review of the Theory of Optimal Control 253
7.1. Variational Arguments 254
7.2. The Maximum Principle: A First Look 262
7.3. Infinite-Horizon Optimal Control 267
7.4. More on Transversality Conditions 278
7.5. Discounted Infinite-Horizon Optimal Control 281
7.6. Existence of Solutions, Concavity and Differentiability* 288
7.7. A First Look at Optimal Growth in Continuous Time 296
7.8. The q-Theory of Investment and Saddle-Path Stability 298
7.9. Taking Stock 304
7.10. References and Literature 305
7.11. Exercises 308
Part 3. Neoclassical Growth 315
Chapter 8. The Neoclassical Growth Model 317
8.1. Preferences, Technology and Demographics 317
8.2. Characterization of Equilibrium 322
8.3.
Optimal Growth 3278.4. Steady-State Equilibrium 328
8.5. Transitional Dynamics 330
8.6. Neoclassical Growth in Discrete Time 333
8.7. Technological Change and the Canonical Neoclassical Model 335
8.8. The Role of Policy 341
8.9. Comparative Dynamics 342
8.10. A Quantitative Evaluation 344
8.11. Extensions 346
8.12. Taking Stock 347
8.13. References and Literature 348
8.14. Exercises 349
Chapter 9. Growth with Overlapping Generations 359
9.1. ProblemsofInfinity 359
9.2. The Baseline Overlapping Generations Model 361
9.3. The Canonical Overlapping Generations Model 366
9.4. Overaccumulation and Pareto Optimality of Competitive Equilibrium in the
Overlapping Generations Model 368
9.5. Role of Social Security in Capital Accumulation 371
9.6. Overlapping Generations with Impure Altruism 373
9.7. Overlapping Generations with Perpetual Youth 377
9.8. Overlapping Generations in Continuous Time 380
9.9. Taking Stock 386
9.10. References and Literature 387
9.11. Exercises 388
Chapter 10. Human Capital and Economic Growth 393
10.1. A Simple Separation Theorem 393
10.2. Schooling Investments and Returns to Education 395
10.3. The Ben-Porath Model 397
10.4. Neoclassical Growth with Physical and Human Capital 401
10.5. Capital-Skill Complementarity in an Overlapping Generations Model 406
10.6. Physical and Human Capital with Imperfect Labor Markets 409
10.7. Human Capital Externalities 415
10.8. The Nelson-Phelps Model of Human Capital 417
10.9. Taking Stock 419
10.10. References and Literature 420
10.11. Exercises 422
Chapter 11. First-Generation Models of Endogenous Growth 425
11.1. The AK Model Revisited 426
11.2. The AK Model with Physical and Human Capital 431
11.3. The Two-Sector AK Model 433
11.4. Growth with Externalities 437
11.5. Taking Stock 441
11.6. References and Literature 443
11.7. Exercises 443
Part 4. Endogenous Technological Change 449
Chapter 12.
Modeling Technological Change 45112.1. DifferentConceptionsofTechnology 451
12.2. Science and Profits 455
12.3. The Value of Innovation in Partial Equilibrium 457
12.4. The Dixit-Stiglitz Model and “Aggregate Demand Externalities” 464
12.5. Individual R&D Uncertainty and the Stock Market 471
12.6. Taking Stock 472
12.7. References and Literature 473
12.8. Exercises 474
Chapter 13. Expanding Variety Models 479
13.1. The Lab-Equipment Model of Growth with Input Varieties 479
13.2. Growth with Knowledge Spillovers 491
13.3. Growth without Scale Effects 493
13.4. Growth with Expanding Product Varieties 496
13.5. Taking Stock 500
13.6. References and Literature 501
13.7. Exercises 502
Chapter 14. Models of Schumpeterian Growth 509
14.1. A Baseline Model of Schumpeterian Growth 510
14.2. A One-Sector Schumpeterian Growth Model 519
14.3. Innovation by Incumbents and Entrants and Sources of Productivity Growth 524
14.4. Step-by-Step Innovations* 536
14.5. Taking Stock 548
14.6. References and Literature 549
14.7. Exercises 551
Chapter 15. Directed Technological Change 559
15.1. Importance of Biased Technological Change 559
15.2. Basics and Definitions 563
15.3. Baseline Model of Directed Technological Change 566
15.4. Directed Technological Change with Knowledge Spillovers 579
15.5. Directed Technological Change without Scale Effects 583
15.6. Endogenous Labor-Augmenting Technological Change 585
15.7. Generalizations and Other Applications 588
15.8. An Alternative Approach to Labor-Augmenting Technological Change * 589
15.9. Taking Stock 594
15.10. References and Literature 595
15.11. Exercises 598
Part 5. Stochastic Growth 605
Chapter 16. Stochastic Dynamic Programming 607
16.1. Dynamic Programming with Expectations 607
16.2. Proofs of the Stochastic Dynamic Programming Theorems* 614
16.3. Stochastic Euler Equations 620
16.4. Generalization to Markov Processes* 622
16.5.
Applications of Stochastic Dynamic Programming 62416.6. Taking Stock 632
16.7. References and Literature 633
16.8. Exercises 634
Chapter 17. Stochastic Growth Models 639
17.1. The Brock-Mirman Model 640
17.2. Equilibrium Growth under Uncertainty 645
17.3. Application: Real Business Cycle Models 654
17.4. Growth with Incomplete Markets: The Bewley Model 657
17.5. The Overlapping Generations Model with Uncertainty 661
17.6. Risk, Diversification and Growth 663
17.7. Taking Stock 681
17.8. References and Literature 682
17.9. Exercises 683
Part 6. Technology Diffusion, Trade and Interdependences 689
Chapter 18. Diffusion of Technology 693
18.1. Productivity Differences and Technology 693
18.2. A Benchmark Model of Technology Diffusion 696
18.3. Technology Diffusion and Endogenous Growth 703
18.4. Appropriate and Inappropriate Technologies and Productivity Differences 708
18.5. Contracting Institutions and Technology Adoption 716
18.6. Taking Stock 729
18.7. References and Literature 731
18.8. Exercises 732
Chapter 19. Trade and Growth 739
19.1. Growth and Financial Capital Flows 739
19.2. Why Doesn’t Capital Flow from Rich to Poor Countries? 745
19.3. Economic Growth in a Heckscher-Ohlin World 747
19.4. Trade, Specialization and the World Income Distribution 757
19.5. Trade, Technology Diffusion and the Product Cycle 769
19.6. Trade and Endogenous Technological Change 774
19.7. Learning-by-Doing, Trade and Growth 777
19.8. Taking Stock 781
19.9. References and Literature 783
19.10. Exercises 785
Part 7. Economic Development and Economic Growth 791
Chapter 20. Structural Change and Economic Growth 797
20.1. Non-Balanced Growth: The Demand Side 797
20.2. Non-Balanced Growth: The Supply Side 805
20.3. Agricultural Productivity and Industrialization 818
20.4. Taking Stock 824
20.5. References and Literature 825
20.6. Exercises 826
Chapter 21. Structural Transformations and Market Failures in Development 831
21.1.
Financial Development 83321.2. Fertility, Mortality and the Demographic Transition 838
21.3. Migration, Urbanization and The Dual Economy 846
21.4. Distance to the Frontier and Changes in the Organization of Production 856
21.5. Multiple Equilibria From Aggregate Demand Externalities and the Big Push 865
21.6. Inequality, Credit Market Imperfections and Human Capital 872
21.7. Towards a Unified Theory of Development and Growth? 885
21.8. Taking Stock 890
21.9. References and Literature 891
21.10. Exercises 894
Part 8. Political Economy of Growth 901
Chapter 22. Institutions, Political Economy and Growth 907
22.1. The Impact of Institutions on Long-Run Development 908
22.2. Distributional Conflict and Economic Growth in a Simple Society 913
22.3. Distributional Conflict and Competition 925
22.4. Inefficient Economic Institutions: A First Pass 938
22.5. Distributional Conflict and Economic Growth: Concave Preferences* 942
22.6. Heterogeneous Preferences, Social Choice and the Median Voter* 949
22.7. Distributional Conflict and Economic Growth: Heterogeneity and the Median
Voter 968
22.8. The Provision of Public Goods: Weak Versus Strong States 973
22.9. Taking Stock 979
22.10. References and Literature 982
22.11. Exercises 985
Chapter 23. Political Institutions and Economic Growth 993
23.1. Political Regimes and Economic Growth 994
23.2. Political Institutions and Growth-Enhancing Policies 999
23.3. Dynamic Tradeoffs 1003
23.4. Understanding Endogenous Political Change 1021
23.5. Dynamics of Political and Economic Institutions: A First Look 1032
23.6. Taking Stock 1044
23.7. References and Literature 1046
23.8. Exercises 1047
Chapter 24. Epilogue: Mechanics and Causes of Economic Growth 1053
24.1. What Have We Learned? 1053
24.2. A Possible Perspective on Growth and Stagnation over the Past 200 Years 1057
24.3. Many Remaining Questions 1067
Part 9. Mathematical Appendices 1071
Chapter A. Odds and Ends in Real Analysis and Applications to Optimization 1073
A. 1. Distances and Metric Spaces 1073
A. 2. Mappings, Functions, Sequences, Nets and Continuity 1077
A. 3. A Minimal Amount of Topology: Continuity and Compactness* 1082
A. 4. The Product Topology* 1088
A.5. Absolute Continuity and Equicontinuity* 1091
A.6. Correspondences and Berge’s Maximum Theorem 1094
A.7. Convexity, Concavity, Quasi-Concavity and Fixed Points 1098
A.8. Differentiation, Taylor Series and the Mean Value Theorem 1101
A.9. Functions of Several Variables and the Inverse and Implicit Function Theorem1105
A.10. Separation Theorems* 1109
A.11. Constrained Optimization 1113
A. 12. Exercises 1118
Chapter B. Review of Ordinary Differential Equations 1121
B. 1. Review of Eigenvalues and Eigenvectors 1121
B. 2. Some Basic Results on Integrals 1122
B. 3. Linear Differential Equations 1124
B. 4. Solutions to Linear First-Order Differential Equations 1125
B.5. Systems of Linear Differential Equations 1128
B.6. Stability for Nonlinear Differential Equations 1130
B.7. Separable and Exact Differential Equations 1131
B.8. Existence and Uniqueness of Solutions 1133
B.9. Continuity and Differentiability of Solutions 1135
B.10. Difference Equations 1135
B. 11. Exercises 1138
Chapter C. Brief Review of Dynamic Games 1139
C. 1. Basic Definitions 1139
C. 2. Some Basic Results 1143
C. 3. Application: Repeated Games With Perfect Observability 1147
C. 4. Exercises 1148
Chapter D. List of Theorems 1151
Chapter 2 1151
Chapter 5 1151
Chapter 6 1151
Chapter 7 1152
Chapter 10 1152
Chapter 16 1152
Chapter 22 1153
Appendix Chapter A 1153
Appendix Chapter B 1154
Appendix Chapter C 1154
References (incomplete)
1157