Endogenous Productivity and Multiple Steady States

Abstract:     
We endogenize total factor productivity in a neoclassical model with increasing returns to scale. We obtain multiple steady-state equilibria with an arbitrarily small degree of increasing returns to scale. While the most productive firms operate across all the steady states, in a poverty trap less productive firms operate as well. This results in lower average firm productivity and total factor productivity. A calibrated version of our model displays sizable differences in TFP and output across steady state equilibria.

Number of Pages in PDF File: 35

Keywords: endogenous productivity, multiple equilibria, poverty traps

JEL Classification: L16, O11, O33, O40

working papers series