Growth Models with Externalities on Networks

Abstract

This study examines the dynamics of capital stocks distributed among several nodes, representing different sites of production and connected via a weighted, directed network.

The network represents the externalities or spillovers that the production in each node generates on the capital stock of other nodes. A regulator decides to designate some of the nodes for the production of a consumption good to maximise a cumulative utility from consumption.

It is demonstrated how the optimal strategies and stocks depend on the productivity of the resource sites and the structure of the connections between the sites. The best locations to host production of the consumption good are identified per the model's parameters and correspond to the least central (in the sense of eigenvector centrality) nodes of a suitably redefined network that combines both flows between nodes and the nodes' productivity.

Keywords: Capital allocation, Production externalities, Network spillovers, Economic centrality measures

JEL Classification: C61, D62, O41, R12