Growth Theory
Sharing the benefits

Early models of investment and savings that assume perfect competition and constant returns to scale can explain neither how an economy's total output increases faster than its total stock of productive factors nor how its dynamic behaviour may differ across countries and historical periods. In more recent models, which relax these assumptions, privately optimal decisions to invest in physical capital, knowledge and innovation increase productive potential, leading to sustained economic growth if the returns to such investment are more attractive than immediate consumption of current output. Increasing returns to scale and/or imperfect competition imply that these returns are partly appropriated by the economy as a whole rather than by those agents that forgo consumption to finance investment.
In Discussion Paper No. 576, Research Fellow Giuseppe Bertola develops a model in which individuals are more or less inclined to support investment-subsidization and profit-enhancing policies depending on the relative weight of income from non-accumulated factors such as land and (unskilled) labour in their total incomes. `Rentiers' who earn income solely from non-accumulated factors never need to save in steady-growth equilibrium and in general oppose investment incentives, which require a reduced share of income for the factors they own. `Capitalists' most of whose income is `profits' from past investment decisions strongly favour such policies, which both permit faster consumption growth and allow them to appropriate a larger share of the economy's initial output. On the other hand, policies that encourage investment by reducing the price of new capital benefit rentiers more than capitalists, whose wealth in consumption terms is reduced by cheaper investment opportunities.
Bertola uses this model to study how conflicting interests determine the extent of political support for `socially preferred' growth-oriented policies. He finds that policy packages designed to favour investment and growth by distorting private incentives also have distributional effects. Governments should therefore devise tax and transfer schemes to ensure that the equilibrium resulting from heterogeneous individuals' private investment decisions replicates the socially preferred outcome. For example, redistributing the ownership of capital may secure unanimous support for policies to achieve fast-growth equilibria; but the political or technical difficulties in implementing such policies result in a realized growth rate that also reflects the heterogeneity of agents' preferences, their relative political weight and the set of policy instruments from which they choose. Without corrective redistributive measures, an economy may grow too fast if too much attention is focused on the investment-enhancing policies suggested by the recent literature on endogenous growth.

Factor Shares and Savings in Endogenous Growth
Giuseppe Bertola

Discussion Paper No. 576, October 1991 (IT)