Working Paper: CEPR ID: DP1052
Authors: Jordi Gall; Fabrizio Zilibotti
Abstract: We analyse the implications for the dynamics of capital accumulation of market power and endogenous demand elasticities, in an environment in which the latter are affected by the number of competitors in each industry. In equilibrium the interest rate increases as capital accumulates, even though the marginal product of capital is constant. Under standard assumptions both a steady-state and a balanced growth path exist, and the possibility of multiple equilibrium paths (for given initial conditions) arises. It is argued that the latter feature matches several empirical observations.
Keywords: endogenous growth; multiple equilibria; endogenous markups
JEL Codes: L13; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital accumulation (E22) | price elasticity of demand (D12) |
| price elasticity of demand (D12) | competition (L13) |
| capital accumulation (E22) | competition (L13) |
| competition (L13) | private return to investment (R42) |
| capital accumulation (E22) | growth trajectory (O41) |
| initial conditions (C62) | growth trajectory (O41) |
| expectations about future economic conditions (E66) | investment decisions (G11) |
| pessimistic expectations (D84) | poverty trap (I32) |
| government interventions (H53) | long-term growth trajectories (O41) |