Economic growth and economic development 596

Introduction to Modern Economic Growth
Given this and (13.4), the maximization problem of the social planner can be
written as
max

Z∞
0

C (t)1−θ − 1
exp (−ρt) dt
1−θ

subject to
N˙ (t) = η (1 − β)−1/β βN (t) L − ηC (t) .
In this problem, N (t) is the state variable, and C (t) is the control variable. Let us
set up the current-value Hamiltonian
h
i
C (t)1−θ − 1
−1/β
ˆ
+ µ (t) η (1 − β)
βN (t) L − ηC (t) .
H (N, C, µ) =
1−θ
The necessary conditions are
ˆ C (N, C, µ) = C (t)−θ = ηµ (t) = 0
H
ˆ N (N, C, µ) = µ (t) η (1 − β)−1/β βL = ρµ (t) − µ˙ (t)
H
lim [exp (−ρt) µ (t) N (t)] = 0.

t→∞

It can be verified easily that the current-value Hamiltonian of the social planner is
concave, thus the necessary conditions are also sufficient for an optimal solution.
Combining these necessary conditions, we obtain the following growth rate for
consumption in the social planner’s allocation (see Exercise 13.7):
´
1³
C˙ S (t)
−1/β
=
η (1 − β)
βL − ρ ,
(13.22)
C S (t)
θ

which can be directly compared to the growth rate in the decentralized equilibrium,
(13.20). The comparison boils down to that of
(1 − β)−1/β β to β,
and it is straightforward to see that the former is always greater since (1 − β)−1/β > 1

by virtue of the fact that β ∈ (0, 1). This implies that the socially-planned economy
will always grow faster than the decentralized economy

Proposition 13.3. In the above-described expanding input-variety model, the
decentralized equilibrium is not Pareto optimal and always grows less than the allocation that would maximize utility of the representative household. The Pareto
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