On the Invariance of the Rate of Return to Convex Adjustment Costs
Andrew B. Abel
University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)
NBER Working Paper No. w8635
The Modified Golden Rule, which relates the rate of return on capital and the growth rate of the capital stock along long-run growth paths that maximize the utility of a representative infinitely-lived consumer, is invariant to the introduction of convex capital adjustment costs. Therefore, along balanced growth paths in neoclassical optimal growth models with an exogenous long-run growth rate of capital, the rate of return is invariant to the introduction of convex adjustment costs, though the capital-labor ratio is reduced along such paths. In AK models, convex adjustment costs reduce the growth rate and rate of return on capital.
Number of Pages in PDF File: 21working papers series
Date posted: February 13, 2003
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