Chapter 3: Economic growth with

endogenous saving behavior: The

Ramsey-Cass-Koopmans model
1 The Ramsey problem
Optimal growth problem introduced by Ramsey:
max
+1
X
o
t
t=0
&(c
t
)
s. t. .
t
c
t
+1
t+1
= 1(1
t
, .
t
) + (1 c)1
t
1
0
given.
or
s. t. c
t
+ (1 +a)I
t+1
= )(I
t
) + (1 c)I
t
I
0
given.
Lagragien:
L = &(c
t
) +o
A
t+1
1 +a
()(I
t
) + (1 c)I
t
c
t
) A
t
I
t
The rst order condition:
&
0
(c
t
) = o
)
0
(I
t+1
) + 1 c
1 +a
&
0
(c
t+1
)
A limit condition:
lim
t!1
o
t
A
t
I
t
= 0
with A
t
the implicit price of capital.
We assume the existence of a stationary state

I such
that:
)
0
(

I) + 1 c = (1 +a) o
The corresponding value of consumption is:
c = )(

I) + (1 c)

I (1 +a)

I
Comparison with the golden rule

^ c,
^
I

:
)
0
(

I) = c +a
^ c = )(
^
I) (c +a)
^
I
Phase diagram.
Explicit resolution in the case: &(c) = ln c, )(I) = I
c
,
c = 1.
Change of variable: a
t
= A
t
I
t
, gives 8t, a
t
= c(1
co).
Results:
c
t
= (1 co)I
c
t
(1 +a)I
t+1
= coI
c
t
2 The decentralized model
We compare the centralized (social optimum solution)
with the decentralized one.
The representative consumer:
max
+1
X
o
t
t=0
&(c
t
)
o
t+1
=
1
1 +a
[(1 +v
t
)o
t
+&
t
c
t
]
o
0
given
lim
t!1
j
t
.
t+1
o
t+1
0
Solution:
&
0
(c
t
) = o
1 +v
t+1
1 +a
&
0
(c
t+1
)
lim
t!1
j
t
.
t+1
o
t+1
= 0
The productive sector:
)
0
(1
t
1
t
) = (v
t
+c)
)(1
t
1
t
) 1
t
1
t
)
0
(1
t
1
t
) = &
t
Equilibrium conditions:
Labor market: 1
t
= .
t
or 1
t
1
t
= I
t
.
Capital market:
t
= 1
t
or o
t
= I
t
.
Consequences: The budget constraint of the consumer is
equivalent to the resource constraint.
The FOC is the same as for the centralized economy.
The limit condition:
For the social planner,
A
t
=
oA
t+1

)
0
(I
t+1
) + 1 c

1 +a
or
A
t
= A
0
(1 +a)
t
o
t
j
t
Therefore, limit conditions are equivalent.
Equivalence of the competitive equilibrium with one rep-
resentative agent and the social planer solution. (First
Welfare Theorem).
3 Introduction of a technical progress
Assume now that production is given by 1(1
t
,
t
.
t
)
with
t
=
0
(1 +o)
t
.
We dene:
~ c
t
= c
t

t
~
I
t
= I
t

t
The resource constraint is now:
~ c
t
+ (1 +a)(1 +o)
~
I
t+1
= )(
~
I
t
) + (1 c)
~
I
t
and the objective function:
T
X
t=0
o
t
&(
t
~ c
t
)
Assume that & is a CES function:
&(c) =
c
11o
1 1o
The objective function can be written:
T
X
t=0
o
t

11o
0
(1 +o)
t(11o)
~ c
11o
t
1 1o
Therefore, the problem is the same as the basic one if we
take:
o
0
! o(1 +o)
11o
(1 +a)
0
! (1 +a)(1 +o)
The golden rule becomes:
)
0
(

I) + 1 c = (1 +a) (1 +o)
1o
o