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Working Paper 2008-023A

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"Endogenous Productivity and Multiple Steady States"
by Levon Barseghyan, and Riccardo DiCecio

We endogenize total factor productivity in a neoclassical model with increasing returns to scale. We obtain multiple steady-state equilibria with an arbitrarily small degree of increasing returns to scale. While the most productive firms operate across all the steady states, in a poverty trap less productive firms operate as well. This results in lower average firm productivity and total factor productivity. A calibrated version of our model displays sizable differences in TFP and output across steady state equilibria.

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