DYNAMIC EXTERNALITIES, MULTIPLE EQUILIBRIA, AND GROWTH

I consider an OLG model with production and a single commodity. I show that in such an environment unbounded growth of income per capita is not possible if the aggregate technology is of the constant returns to scale type. I introduce an external effect in the aggregate production function and derive conditions under which persistent growth is an equilibrium outcome. The introduction of an external effect also creates "poverty traps" and open sets of initial conditions for which there exists an infinite multiplicity of equilibria. When such a multiplicity exists, equilibria with the same initial position will display different asymptotic behaviors. Finally, I show that by introducing appropriate tax schemes a unique equilibrium path can be selected. © 1992.