Autori
Bartolini, Stefano
Bonatti, Luigi

Titolo
Growth as a coordination failure
Periodico
Università degli studi di Trento. Dipartimento di Economia. Discussion papers
Anno: 1998 - Fascicolo: 5 - Pagina iniziale: 1 - Pagina finale: 36

In this paper we present an original neoclassical growth model in which growth is caused by negative extemalities. This idea is in sharp contrast with the emphasis placed on positive externalities by current endogeous growth models. Here is a brief desciption of the growth mechanism on which this model is based. Welfare depends on three goods: leisure, a free environmental renewable resource, and a non-storable output, which may be used as a substitute for the environmental resource or employed to satisfy needs different from those satisfied by the resource. The environmental resource is subject to negative extemalities, that is, it is deteriorated by the production and consumption of the output. Markets for output and labour are perfectly competitive. Faced with a forced reduction of the resource, agents react by increasing labour supply in order to raise their purchasing power regarding the substitute for the diminishing environmental resource. The increase in production and consumption that follows generates further deterioration in the environmental good, thus feeding the process, etc.. The model predicts that shocks which raise the level of negative extemalities, of the population, of labour productivity, or which reduce the endowment of the resource, generate growth. We discuss the motivations of the model, namely to provide an analytical framework for an enormous body of literature and knowledge which extends well beyond the bounds of economics. The welfare implications of the model are in sharp contrast with the traditional view of growth, according to which increasing quantities of goods become available as growth proceeds, thus improving individual well-being. The model suggests that this tells only part of the story, since the other part concerns free goods which progressively become costly ones. In this context undesirable growth may arise: beyond a certain level of activity, welfare decreases monotonically with higher steady state levels of activity. Hence, beyond the optimal activity level, growth is fed by Pareto- worsening coordination failures; that is, it is generated by an excessive lise of labour and environment for production purposes. This coordination failure is due to market incompleteness: a missing market for the scarce resource generates growth. This may explain 'the broken promises of growth', that is the fact that there is no convincing evidence about a positive correiation between growth and weII-being. The model can give some insights to understand other phenomena. We first suggest an explanation of why an urban-industrial society generates growth, and then we explain why a rurai society may become urbanized and undertake an industrial transition. Both explanations are different from the current ones. We then provide some exampies of how the model' s predictions can be used to shed light on some aspects of the Industrial Revolution. FinaIly we offer an explanation of the reiationship between technical progress and labour supply in advanced economies.




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