Optimal Patterns of Consumption and Development Expenditures in the Presence of Productivity Thresholds

Andrew W Horowitz

International Economic Review, 1993, vol. 34, issue 1, 193-202

Abstract: Standard growth and development models imply that steadily rising consumption will accompany development. When some inputs require a minimum stock before becoming productive, however, these appealing results may no longer hold. This paper characterizes optimal consumption and investment in a model with a traditional and modern technology and a lumpy modern factor. Rather than smooth, momentum building growth, the optimal program displays dramatic nonmonotonicities. In particular, the model predicts distinct modern and traditional investment regimes and an interval of falling aggreg ate consumption during the final transition from a traditional to a mode rn economy. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1993
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