Optimal Growth Strategy Under Dynamic Threshold

We consider an economy in which the technology exhibits nonconvexities due to fixed costs associated with production. Taking into account the incentives for investment to decrease the fixed costs, we characterize the circumstances under which an underdeveloped economy can catch up with the developing ones. We show that it is optimal to get rid of the fixed costs inherent in production at a finite period of time so that the economy will eventually converge to a positive steady state level of per capita income independent of the initial level of capital stock. Indeed, we obtain that even though the income disparities may be very persistent and can be perceived as poverty traps, all economies would ultimately converge to the same steady state level of per capita income.