Endogenous Growth, Trade, and the Environment

Abstract

<p>This dissertation presents two essays on endogenous growth and renewable resources.</p><p>The first essay explores the role of renewable resources in a tractable</p><p>model of endogenous growth driven by horizontal and vertical innovation in the closed economy.</p><p>The model is tractable in that it yields a complete, analytical characterization</p><p>of the path of utility and the associated welfare level. This property</p><p>is exploited to compare two cases of renewable resource management:</p><p>open access and full property rights. The first case involves a common</p><p>property problem in which agents ignore the long-term resource viability;</p><p>the second fully internalizes the dynamics of the resource stock.</p><p>Analysis shows that if the natural regeneration rate of the renewable</p><p>resource is too low, the tragedy of the commons occurs. If, instead,</p><p>the natural regeneration rate is sufficiently high, the steady-state</p><p>growth rate of the economy is identical across the two management</p><p>regimes. The reason is because there is no scale effect; that is,</p><p>the steady-state growth rate of the economy does not depend on the</p><p>labor or the resource endowment. However, the development path on</p><p>which the economy transits from the developing stage (no R\&D activity)</p><p>to the developed stage (positive R\&D activity) depends on the resource</p><p>management regime. In particular, a developing economy under full</p><p>property rights will cross its development threshold prior to one</p><p>under open access. This threshold depends on the size of the manufacturing</p><p>firms. When it becomes sufficiently large as a result of the decline</p><p>in the number of firms over time, there will be an incentive for the</p><p>remaining firms to conduct R\&D. Given the same number of manufacturing</p><p>firms, the firm size is larger under full property rights than under</p><p>open access due to higher nominal expenditure per capita. Therefore,</p><p>the development threshold will be reached sooner under full property</p><p>rights. In other words, the economy will start engaging in R\&D activities</p><p>sooner and more quickly accumulate knowledge, which is the source</p><p>of long-run growth. Moreover, switching from full property rights</p><p>to open access is welfare reducing due to two effects. The first is</p><p>through the price of the harvest good. Although the economy initially</p><p>enjoys a lower price of harvest good, the price gradually increases</p><p>as the resource becomes scarcer. Secondly, the competitive household</p><p>instantaneously loses the resource income and thus spends less on</p><p>manufacturing goods. This decreases the incentive for manufacturing</p><p>firms to conduct R\&D and results in a temporary deceleration of the</p><p>growth rate of TFP relative to the baseline case of full property</p><p>rights. The economy therefore experiences a cumulative loss of TFP</p><p>relative to the baseline, which is the novel feature of our model</p><p>of endogenous innovation. This mechanism has interesting and wide-ranging</p><p>implications for the role of resources in development and growth</p><p>The second essay extends the model of endogenous growth and renewable </p><p>resources into the open economy framework. The paper examines the effect of trade liberalization on resource-rich</p><p>countries, based on a two-country model in which the difference in</p><p>endowment of a renewable resource leads to asymmetric trade. In this</p><p>model, the resource-rich economy trades its harvest good and final</p><p>good for the final good from the resource-poor economy. Furthermore,</p><p>the renewable resource is considered to be under open access, where</p><p>there is no clear ownership over the resource, leading to overexploitation.</p><p>Long-term productivity, in this case, stems from endogenously-determined</p><p>knowledge accumulation. Under these circumstances, analysis shows</p><p>that the resource-rich country will lose from trade due to two effects.</p><p>The first effect is the instantaneous loss of income. Higher demand</p><p>for the harvest good, from the combined domestic and international</p><p>demand, diverts labor away from the production of technological goods</p><p>to the harvest sector, where rent is zero. The second effect is a</p><p>scarcity effect, which becomes more severe when trade results in a</p><p>greater demand for the harvest good. Overexploitation of the renewable</p><p>resource today leads to falling resource stock in the future, which</p><p>is then reflected in the higher price of harvest good, other things</p><p>being constant. Since the harvest good is an essential input to produce</p><p>the final good, given the same amount of the other inputs, the amount</p><p>of final good produced will also fall in the long run.</p>