Factor Income Distribution and Endogenous Economic Growth - When Piketty Meets Romer

47 Pages Posted: 12 Jan 2017

See all articles by Andreas Irmen

Andreas Irmen

University of Luxembourg - Ceter for Research in Economic Analysis (CREA); CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Munich

Amer Tabakovic

Universite du Luxembourg

Date Written: November 2016

Abstract

We scrutinize Thomas Piketty’s (2014) theory concerning the relationship between an economy’s long-run growth rate, its capital-income ratio, and its factor income distribution put forth in his recent book Capital in the Twenty-First Century. We find that a smaller long-run growth rate may be associated with a smaller capital-income ratio. Hence, the key implication of Piketty’s Second Fundamental Law of Capitalism does not hold. In line with Piketty’s theory a smaller long-run growth rate may go together with a greater capital share. However, the mechanics behind this result are the opposite of what Piketty suggests. Our findings obtain in variants of Romer’s (1990) seminal model of endogenous technological change. Here, both the economy’s savings rate and its growth rate are endogenous variables whereas in Piketty’s theory they are both exogenous parameters. Including demographic growth in the spirit of Jones (1995) shows that a smaller growth rate of the economy may imply a lower capital share contradicting a central claim in Piketty’s book.

Keywords: endogenous technological change, capital accumulation, aggregate factor income distribution

JEL Classification: E100, E210, E250, O330, O410

Suggested Citation

Irmen, Andreas and Tabakovic, Amer, Factor Income Distribution and Endogenous Economic Growth - When Piketty Meets Romer (November 2016). CESifo Working Paper Series No. 6217. Available at SSRN: https://ssrn.com/abstract=2897494

Andreas Irmen (Contact Author)

University of Luxembourg - Ceter for Research in Economic Analysis (CREA) ( email )

162a, avenue de la Faïencerie
Luxembourg, L – 1511
Luxembourg

HOME PAGE: http://wwwen.uni.lu/recherche/fdef/crea/people/andreas_irmen

CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Munich

Poschinger Str. 5
Munich, DE-81679
Germany

Amer Tabakovic

Universite du Luxembourg ( email )

L-1511 Luxembourg
Luxembourg

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