Transitional Dynamics in Two-Sector Models of Endogenous Growth.
Casey B. Mulligan and Xavier X. Sala-i-Martin
Quarterly Journal of Economics, 108(3), August 1993: 739-73.
We analyze the steady state and transitional dynamics of two-sector
models of endogenous growth. The necessary conditions for endogenous growth
imply that transitions depend only on a measure of the imbalance between the
two sectors such as the ratio of the two capital stocks.
We use the Time-Elimination Method to analyze the transitional dynamics.
Three main economic forces drive the transition: a Solow effect, a consumption
smoothing effect and a relative wage effect. For plausible parameterizations,
the consumption smoothing effect tends to dominate the relative wage effect;
transition from relatively low levels of physical capital is accomplished
through higher work effort rather than higher savings.
A longer version of the paper was circulated as
NBER Working Paper No. 3986, February 1992.