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.