Notes on an Endogenous Growth Model with two Capital Stocks II: The Stochastic Case



A.2 The centralized economy

The social planner’s optimization problem can be rewritten such that in every period t
the states k
t and ht are given and next period’s states kt+1 and ht+1 have to be chosen,
i.e. we want to replace the variables c
t and ut. Equation (9) can be solved for ct and
the resulting expression can be substituted into the utility function. Similarly, we solve
equation (4) for u
tht and insert the result into the production function. In terms of the
state variables, the planner’s maximization problem is now given by:

sup    E0


{kt+1 ,ht+1}t=0


βtF (kt, ht, kt+1, ht+1, At)

t=0

such that

F (kt, ht,kt+1,ht+1,


At) = ln Atkt (ht - ht+1 ) 1 α hγ - kt+1

0 < ht+1 < Bht,

0<kt+1 < Atktαht1-α+γ,

ln At+1 = ρlnAt + εt+1.

Hence, let (ht, kt)T X = R2++ and At Z = R++ with the Borel sets X and Z. Let
β
(0, 1) and let:

Γ(kt, ht, At) = (kt+1


,ht+1) Atkt (ht-^⅛+1 )   hγ-kt+1 R++; kt+1,ht+1 > 0|

and


F(kt, ht, kt+1, ht+1, At) = ln


At kα (htB+1 )    hγ—kt+1


where α (0, 1) and γ [0, α). Let the exogenous shocks be serially correlated with
E[ln A
t+1] = ρln At. In order to apply Theorem 3, we want verify that Assumptions 1
and 2 hold; find (v, G) and construct the plan π
*(; x, z), for all (x, z) S, and show that
the hypotheses (a) and (b) hold.

Clearly Assumption 1 holds: Γ(k, h, A) = 0 and there are lots of measurable selections,
for example,

h(ht,kt,At) = ( 1 Bht, 1 Atktαht1-α+γ) Γ(ht,kt,At).

To establish that Assumption 2 holds, note first that the per—period return func—
tion F
[π1-1(At-1), π2-1(At-1), πt1(At), π2(At),At] is μt(A0, )-integrable and second that
for any (h
t, kt, At) and any π Π(ht, kt, At) for all t N:

ln πt1-1 (At-1 ) < t ln B + ln h0                                                     (38)

t-1                                  t-1

ln πt2-1(At-1) <       αi ln At-1-i + (1 - α + γ)     αi ln πt1-2-i(At-2-i) + αt ln k0

i=0                           i=0

holds. Using the first inequality (38), we may further simplify the second and finally
arrive at the following condition:
7

t-1

ln∏t2-1(zt-1)  <  αi lnAt-1-i + (ɪ + (τ⅛p∙} (1 -α + γ) ln B + αt ln ko

i=0

+ (1+γ)(1t) ln ho.

1-α            0.

7Note, that Γts = α .1-α. 2 - α1 + t holds.

,          s=0           (1-α)2     1-α .

16



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