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OUTPUT EXTERNALITIES ON TOTAL FACTOR PRODUCTIVITY

Published online by Cambridge University Press:  01 August 2016

Julio Dávila
Julio Dávila*
Affiliation:
Université catholique de Louvain
*
Address correspondence to: Julio Dávila, Center for Operations Research and Econometrics, Voie du Roman Pays 34, L1.03.01, B-1348 Louvain-la-Neuve, Belgium; e-mail: julio.davila@uclouvain.be.
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Abstract

The impact that output has on future total factor productivity is not internalized by competitive agents. As a result, the allocation that a planner would choose cannot be reached as a competitive equilibrium outcome (neither for infinitely lived agents nor for overlapping generations): the market remuneration to capital and labor is too low. The planner's allocation can nonetheless be implemented by a fiscal policy subsidizing the returns to savings and the wage rate as needed. The exact policy differs depending on whether only past investment or total output influences productivity: in the first case only capital returns need to be subsidized, whereas in the second case labor income needs to be subsidized too. The policy is balanced period by period by means of a lump-sum tax.

Keywords

TFPLearning by DoingDynamic ComplementaritiesExternalities
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 6 , September 2017 , pp. 1389 - 1425
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

The author thanks Andrés Carvajal for very helpful discussions about the results presented in this paper. Insightful feedback from David de la Croix on a previous version of this paper is also gratefully acknowledged. The author thanks the Belgian FNRS research project PDR T.0044.13 for funding.

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