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ENDOGENOUS GROWTH, BACKSTOP TECHNOLOGY ADOPTION, AND OPTIMAL JUMPS

Published online by Cambridge University Press:  12 November 2010

Simone Valente*
Affiliation:
Center of Economic Research, ETH Zürich
*
Address correspondence to: Simone Valente, Center of Economic Research, Eidgenössische Technische Hochschule Zürich, Zürichbergstrasse 18, CH-8032 Zürich, Switzerland; e-mail: svalente@ethz.ch.

Abstract

This paper analyzes a two-phase endogenous growth model in which the adoption of a backstop technology (e.g., solar) yields a sustained supply of essential energy inputs previously obtained from exhaustible resources (e.g., oil). Growth is knowledge-driven and the optimal timing of technology switching is determined by welfare maximization. The optimal path exhibits discrete jumps in endogenous variables: technology switching implies sudden reductions in consumption and output, an increase in the growth rate, and instantaneous adjustments in saving rates. Due to the positive growth effect, it is optimal to implement the new technology when its current consumption benefits are substantially lower than those generated by old technologies.

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Articles
Copyright
Copyright © Cambridge University Press 2010

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