No One is Alone: Strategic Complementarities, Capacity Utilization, Growth, and Distribution

38 Pages Posted: 22 Feb 2018 Last revised: 17 Apr 2019

See all articles by Luke Petach

Luke Petach

Belmont University

Daniele Tavani

Colorado State University, Fort Collins - Department of Economics

Date Written: April 15, 2019

Abstract

A longstanding criticism to Keynesian and Kaleckian growth theories is the question: why would firms operating with underutilized capacity accumulate capital stock? Our answer hinges on firms’ utilization choices depending on their beliefs about the level of demand, as captured by aggregate utilization. In a simple growth and distribution model, we show that: (i) desired utilization is en- dogenous to beliefs; and (ii) the equilibrium utilization rate is inefficiently low. We then turn to different model closures to draw policy implications: (iii) with a Classical closure, equilibrium growth and profitability are both strictly below their efficient values; (iv) with a Kaldor/Pasinetti closure, the equilibrium labor share is strictly below the value corresponding to efficient utilization. Spending policies can be used to achieve the efficient outcome. Finally, we use state-by-sector BEA data to validate our hypothesis: estimation results provide strong and robust support for our model in the US.

Keywords: Capacity Utilization, Factor Shares, Growth, Strategic Complementarities

JEL Classification: B50, E12, E22, E25

Suggested Citation

Petach, Luke and Tavani, Daniele, No One is Alone: Strategic Complementarities, Capacity Utilization, Growth, and Distribution (April 15, 2019). Available at SSRN: https://ssrn.com/abstract=3123149 or http://dx.doi.org/10.2139/ssrn.3123149

Luke Petach

Belmont University ( email )

1900 Belmont Blvd.
Nashville, TN 37212-3757
United States

Daniele Tavani (Contact Author)

Colorado State University, Fort Collins - Department of Economics ( email )

Fort Collins, CO 80523-1771
United States
9704916657 (Phone)

HOME PAGE: http://https://economics.colostate.edu/author/dtavani/

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