Endogenous Growth and Competitive Markets

In the present paper, an optimal growth model for which transformation possibilities are supposed to be bounded in the short run and unbounded in the long run - maybe due to adjustment costs or accummulation costs - is considered. It is shown that equilibria exist and that equilibrium allocations are Pareto optimal and exhibit perpetual growth. The model of the present paper combines features of models with increasing returns to scale and externalities and features of models with constant returns to scale in the sense that it is capable of explaining why different countries experience different growth patterns and that equilibrium allocations are Pareto optimal.