Economic Growth in the Information Society: Can

Information and Communication Technologies Increase

Economic Growth?

Nicolás Barone

Universidad Externado de Colombia

Abstract
Societies are evolving from industrial to information societies. The econ-
omy in this new society has an Information and Communication Technol-
ogy structure (ICT) which helps to transmit knowledge from information
ows faster and expands the market size. As a consequence, it increases
the return from specialization boosting the spillover eect and nally gen-
erating a positive eect on the rate of economic growth. On the other
hand, there are ineciencies associated with distortions in the use of in-
formation that results in market power and can reduce the spillover eect.
Nevertheless, the endogenous growth model adapted for the information
society proposed here nds that when the agent's capacity for processing
and acquiring information is high jointly with a developed ICT infrastruc-
ture the total eect of ICT on growth is positive. Otherwise, the burden
of the ineciencies slows down the economic growth.

1 Introduction

The Information and Communication Technologies have created a platform

where knowledge transmission and acquisition take place and have made lter-
ing and processing more ecient, this platform is denominated the information
society. It is composed of an ICT infrastructure and has specialize agents in
acquiring, ltering and processing information (ICT agents). This society has
increased the quantity of interactions between countries, sectors, and individu-
als. These interactions allow a more dynamic knowledge exchange that could
be protable for the economy. From an economic point of view, agents could
take advantage of the available information and boost the knowledge spillover
eect, however, there are ineciencies associated with the use of information
that results in market power and can reduce this eect.

There are two ways in which ICT can contribute to economic growth. Firstly,
the direct contribution to GDP by the production of ICT goods and services.

1
Secondly, the contribution of ICT to technological progress. This paper focuses
on the second reason rather than the rst one. The main argument, is that
specialization process can be boosted when the economy unfolds in the dynamic
knowledge exchange environment described above. For that purpose, the model
of this paper considers the information platform described above.

According to the World Bank, the population growth rate has been in decline
since 1968. Jones (2016), shows that the long run economic growth rate in devel-
oped countries has been increasing since WWII with a lesser contribution from
the population. In endogenous growth theory, the economy can grow without
bound, however, the performance described by Jones cannot be completely ex-
plained by endogenous growth theory. That is because it has not incorporated
a boost factor which allows to the economy to grow at that level. In the re-
search proposed here, it is assumed that this boost factor comes from ICTs due
to the network externalities, which invigorate knowledge transmission through
information ows.

Several models of endogenous growth such as Young (1928), and more specif-
ically expanding variety models such as Romer (1986), Benassy (1998), Bucci
(2013), have analyzed the eect of knowledge spillover and specialization in the
rate of economic growth. These authors assume that knowledge is an input
and new technologies are created in a research sector. However, they have not
considered ICT infrastructure and the agent's capacity for processing and lter-
ing the knowledge from information ows to create or adopt new technologies.
This consideration has at least three important implications for the economy
that the model proposed here takes into account. First, with an ICT structure,
agents could enhance the economic performance. Second, the use of information
may lead to a distortion that has a potentially negative impact on the economic
growth. Finally, it implies that knowledge as an input for new technologies has
a probability to be successfully identied.

The aim of this paper is to explain the relationship between the information
society and economic growth. For this purpose will be setting an endogenous
growth model with a stochastic framework for the production of new technolo-
gies based on information. The key issue is to describe the eect that ICTs
have on economic growth. Adapting the framework from Benassy (1998) and
Bucci (2013) for an ICT approach of an endogenous growth model, the results
allow two scenarios: the specialized economy scenario where agent's capacity is
high and the economy grows faster without strong support from the population
and the complexity diseconomy
1 scenario where agent's capacity is low, and the
economy grows slower.

This paper is organized as follows. The next subsection details some stylized
facts that support this work. Section 2, is a literature review focused on two
fundamental issues: the economic implications of the information society and
endogenous growth models. Section 3, develops the model through the inclusion

1 Bucci (2013) denes the complexity diseconomy scenario as a situation where there is a
large variety of intermediate goods.

2
of two parameters related to the information framework: one for the informa-
tion infrastructure, and the other, measures the agent's capacity for processing
information. The model analyses the ineciencies through the solutions for the
central planner and for the decentralized economy. In addition, in section 3
there is a Slutsky decomposition of the production function which describes the
link between the ICT parameters, the income eect, and demand. Finally, Sec-
tion 4 makes a comparison between the central planner and the decentralized
solution.

1.1 Stylized Facts

ˆ Accelerated growth: The graphic below shows a growth index for the US
and western Europe. An accelerated growth can be observed from the
beginning of XVIII century concurring with the industrial revolution and
an even more accelerated growth after WWII.

Figure 1: Economic growth

a
a Jones (2016)

ˆ Decreasing population growth: This table shows that in the XXIst century,
economic growth cannot be totally supported by population growth. For
this reason, a boost factor would be adequate to explain the accelerated
economic growth.

3
 Table 1: Economic and population growth

a
a Jones (2016)

ˆ Technology diusion: Comin and Hobijn (2010) show that after the WWII
lags in technology diusion have become shorter. Mechanisms of technol-
ogy diusion recognized by Comin and Mestieri (2013) are inuenced by
ICT and are evolving and taking a specic form in the information society.
There are three broad mechanisms:

 Human capital: Sasvari (2011) shows the importance of a high level

of human capital for the adaptation to ICT. However, ICT enhances
human capital by bringing faster education to a large number of
people.

 Geographic interactions: Adopting a technology requires acquiring

knowledge which often comes from interactions with other agents.
The frequency and success of these interactions is likely to be shaped
2
by geography . ICT has brought agents closer because interaction
takes place without physical contact.

 Demand: The level of demand is an important factor which encourage

people to adopt a new technology. As a result of the cross-sector
interactions, an increase in demand takes place and the performance
of these interactions helps to boost economic growth. Karagöl and
Erdil (2014) highlight that ICT boost these interactions.

2 Literature review

2.1 Economic implications of the information society

Bell (1976) explains how societies, mainly the the US-society, began the tran-
sition from an industrial to an information society after WW II. The following
denition is useful to understand the changes in this transition. The term infor-
mation society refers to a mode of social and economic development in which
acquisition, storage, processing, enhancement, transmission, distribution and
dissemination of information leads to: knowledge creation, satisfying the needs

2 Comin and Mestrieri (2013)

4
of citizens and companies, economic activity, wealth creation, the denition of
quality of life of citizens and their cultural practices
3 .Becla (2012) shows the
characteristics which identify a society as an information society. These are: A
developed ICT infrastructure, an important share of ICT sector in the GDP,
non-exclusion of ICT by any other sector and the skillfulness level of ltering
information by the economic agents.

In the eighteenth century, François Quesnay designed a circular ow based on

the agricultural sector, which explained the economic system in the agricultural
society. Adam Smith made the rst approach to an industrial based economy.
The most important economic implication of each society is the scale of each
one. According to Bell, in the agricultural society, the scale is given by the
limitation of natural resources. In the industrial society, it is given by the
manufacturing sector and investment choices, in the information society it is
given by the transmission of knowledge by information ows and the capability
of the economic agents to process and lter information. .
4

A signicant issue in any economic system is that agent's interactions are impor-
tant on the trend of economic growth due to the fact that stimulate technological
change, specialization, etc. The information society connects more agents into
the economy generating more interactions. Sasvari (2011) remarks that the use
of ICT makes all economic sectors more dynamic due to the technological and
economic links, in consequence, the total factor productivity (TFP) increases.
However, those interactions have a certain probability of generating a successful
match which has a real impact on the trend of economic growth.

There are several institutions setting up indicators to measure the maturity

of the information society. For example, the International Telecommunication
Union makes an annual report with a multidimensional ICT index composed
by 11 indicators aggregated into three broad categories: access, use, and skills.
In 2016, Nigeria obtained a score on this ICT index of 1.03 while countries
such as South Korea and the United States obtained 8.78 and 8.06 respectively.
Focusing on a long-run growth path, there is a potential link between growth
and ICT that is analyzed in this work.

2.2 Specialization, increasing returns and endogenous growth mod-

els

The model of this paper studies an economy like Young (1928). It is con-
venient to use Young's framework because the mechanisms of transmission are
the key for a self-generated growth rate. In this approach, the division of labor
(specialization) plays an important role changing the industrial conditions and
generating responses on the overall market levels. However, the division of labor
is limited by the extent of the market. This implies that in a little market it is

3 Coelho (1997)
4 See the appendix for a detailed scheme

5
not protable to have a high-level of specialization, in Young words, it would
be wasteful to make a hammer to drive a single nail. In other words, the de-
mand for hammers depends on the size of the market for nails, for Young, the
proxy for the market size is the total income, which means that for a high-level
of income it is fruitful to have a high-level of specialization. For this reason,
section 3 analyses the eect of ICT parameters and demand through a Slutsky
decomposition of the production function.

One of the rst models based on Young´s approach is Romer (1986). This is
an endogenous growth model with expanding varieties and increasing returns,
where knowledge is an input that has increasing marginal productivity in the
production function. For him "the creation of new knowledge by one rm is
assumed to have a positive external eect on the production possibilities of other
rms because knowledge cannot be perfectly patented or kept secret." Benassy
(1998) uses a production function where the degree of returns from specialization
can be set independently of the monopolistic markup. As a consequence, it
cannot be said a priori that exists a low-level of research in the decentralized
market solution.

An example of a model without gains from specialization is Agion and Howitt

(1998, Chapter 12) and Bucci (2013). The reason given by both authors is that
having a high variety of intermediate goods also makes life more complicated,
and creates a greater chance of error. The advantage of Bucci's model is that
it allows two scenarios, with and without gains from specialization.

In section 2.1, the information society was described as a platform which allows a
high amount of agents interacting thought ICTs and this is how ICT can expand
the market size. In fact, ICTs can connect more agents without an increase in
population. Therefore, the society can benet from a deeper specialization
which stimulates the creation or adoption of new technologies. Then, Young's
cycle is amplied in the information society by the network externalities and
the connectivity between sectors.

The picture below shows this cycle. In the endogenous models mentioned above,
there are some ineciencies generated by the monopolistic competition in the
intermediate goods sector. The use of ICTs generates an additional source of
ineciencies due to the potential distortions embodied in the interaction across
agents.

6
 Figure 2: Young's Cycle

The model developed here applies Young's approach through Benassy's frame-
work and introducing an ICT environment. Moreover, it allows solutions with
and without gains from specialization.

3 The model

The model follows Benassy (1998), however, instead of an R&D sector, which
produces new knowledge through a scientic activity, the model has an infor-
mation sector, where technologies are discovered by searching from a set of
technologies already created and codied in information ows. At the limit,
this searching activity is bounded by R&D production.

Each technology from [0, nt ] embodied an intermediate good j . This economy

has a total amount of eort L = L1 + L2 , which is used to produce intermediate
goods and acquire information.

3.1 Preferences

The preferences are described by the following utility function:

ˆ∞
Ut = e−ρt lnCt dt (1)

Where Ct is the consumption and ρ is the discount rate.

7
3.2 Production
There are three sectors of production. The nal goods sectors, the intermediate
goods sector and the information sector that will be described in section 3.3.

3.2.1 The nal goods sector produces output Y by using intermediate goods
indexed by j.

 αι
ˆ  α
 n
j ι
Yt = Ct =  xt dj  (2)

xjt is the amount of the intermediate good j and ι > 15 is an ICT index,
6 which
shows the level of development of ICT in the economy. Then, ι is the proxy for
the ICT infrastructure.

Usually, expanding variety models set the degree of return of specialization

equal to the monopolistic markup due to the particular assumption of a CES
function. However, Benassy set the degree of return from specialization free
from the monopolistic markup then:

Yt = Ct = nv Xt (3)

Where Xt is the total amount of the intermediate goods and vt ≥ 0 is the value
of new varieties and also the proxy for the degree of returns from specialization.
This implies that vt is not necessarily equal to the monopolistic markup.
7

The balanced growth path for the economy is given by:

ṅ
g∗ = gy = gc = gn = (4)
n
As Benassy (1998) equation (4) shows that the balance growth path is deter-
mined by the rate of innovation.

3.2.2 The intermediate goods sector produces the amount of each good by the
following technology:

xjt = l2j (5)

Where l2j is the eort dedicated to produce the intermediate good j. Also,
(5) implies that Xt = L2
5 See Broda, C., J. Greeneld, and D. Weinstein. (2006) for this kind of specication
6 The ICT index measures the network infrastructure and the use of ICT in the society.
For a wide explanation see the International Telecommunication Union report.
7 v measures the grade which society benets from specializing production between a large
numbers of intermediate n.

8
3.3 Information sector

In this model, knowledge is codied in information ows. ICT sector generates

information, which increases the probability of discovering new technologies
to produce intermediate goods. Agents build up information by the following
technology:

I˙t = ιL1 (6)

This equation shows the net variation of information in terms of the eort
dedicated to acquiring information L1 and the ICT infrastructure. In addition,
equation (5) implies that L − Xt = L1 . So, if too much eort is dedicated to
the intermediate goods sector, then, less eort will be dedicated to building
up information. Furthermore, the information is bounded by the technological
frontier. Hence, over there, information can just increase at the same rate that
the technological frontier expands (R&D production). Then, there are constants
returns in the information sector.

The next section describes the knowledge accumulation process in the informa-
tion sector.

3.3.1 Knowledge accumulation

Knowledge is represented by varieties (n) which embody technologies to produce

intermediate goods. The process for acquiring new varieties follows the Poisson
structure used by Valencia (2014).

∆nt = nt (η∆It + ∆m)

Where η>0 measures the rate at which information is accumulated over time
and also is the proxy for agents capacity to acquire information. Through η the
economy builds up the information for new technologies that were generated
using the ICT infrastructure and applying an amount of eort L1 .
(
0 with probability 1 − ιL dt
∆I (t) =
1 with probability ιL1 dt

The second component characterizes the technology obsolescence and is given

by:

(
0 with probability 1 − µdt
∆m (t) =
1 with probability µdt

Hence, the mean technology growth is given by its expected value

9
  
ṅ
E = ηιL1 − µ (7)
n

In equation (7) its observed the two ICT parameters. The ICT index ι > 1 works
as a boost factor for the eort dedicated to acquire information. However, the
rate of accumulation 0 < η < 1 indicates that there is a limit in the acquisition of
information. When η = 1 all the information generated is accumulated. Then,
for a boost eect the condition is ηι > 1. Finally, the rate of obsolescence µ has
a negative eect.

3.4 The Social Optimum

As Benassy states, nal goods are produced by competitive rms by the follow-
ing production function:

 αι
ˆ  α
 n
ι
Yt =  xjt dj 
0

The central planner must choose the amount of eort that will be devoted to
the production of intermediate goods, the remain L − Xt will be devoted to
acquire information. The program associated to this maximization problem is:

ˆ∞
M ax{xt } = e−ρt (ln(Xt ) + vln (n)) dt st ṅ = ηιn (L − Xt ) − nµ
0

FOC:

 
1
[Xt ] : e−ρt = λt ηnι (8)
xt

[Nt ] : vt e−ρt = −λ˙t (9)

Equation (8) shows that the marginal value of intermediate goods must be equal
to the marginal value of eort in the information sector. Equation (9) implies
that the marginal value for an additional variety must be equal to the degree of
return from specialization multiplied by the discount factor.

Proposition 1
The rst best allocations for this economy are characterized by:

10
 ∗ ρ
Xt∗ = L2 = (10)
vηι

ρ
L∗1 = L − (11)
vηι

v vt ρ
Yt∗ = Ct∗ = (nt ) t Xt∗ = (nt ) (12)
vηι
   
ṅ ρ
g∗ = = max 0, ηι L − −µ (13)
n vηι

Equation (10) shows that the eort dedicated to producing intermediate goods
is decreasing on v ,η and ι. Then, an improvement in ηι or an increase in ν
shifts eort from the intermediate goods sector to the information sector. This
is clearer in equation (11). Equation (13) is the economic growth rate in the
central planner problem which is determined by the information sector. For
this reason an improvement in ηι increases the economic growth rate.

If η = 0, no matter how advanced the ICT infrastructure is, the economy will
have a negative growth rate equal to the obsolescence rate. Of course, as Sasvari
(2011) stress, there is a direct relation between ι and η that makes this situation
highly implausible. This relation is not detailed in this model.

3.5 Decentralized allocations

The decentralized decisions of households and rms are according to the follow-
ing timing:

Stage 1: Intermediate goods rms invest in acquiring information. So they have

cost associated to the acquisition of information.

Stage 2: ICT agents choose an eort level

Stage 3: Varieties are discovered using eort and the ICT infrastructure.

Stage 4: Intermediate goods are produced by a monopolistic competitive rm

and sold to price taking rm

Stage 5: Final product is equal to nal consumption

3.5.1 Households

Households are endowed with a total quantity of eort L and maximize the
following utility function:

The eort from households is distributed between the information sector and
the intermediate goods sector.

11
 ˆ∞
M ax{xt } = eρt ln(Ct ) dt st Ct + vt ṅt = Wt Lt + πnt (14)

Where Wt = w1t + w2t corresponds to the sum of wages in the information

sector and the intermediate goods sector. In fact, w1t must be equal to the cost
associated with acquiring information.

The left side of the budget constraint shows that spending is composed by
consumption of nal goods and new varieties while the right side shows that the
distribution of income between wage and prots.

FOC:

vt
[Ct ] : e−ρt = λt (15)
Ct

π
[nt ] : λt = −λ˙t (16)
vt

In equation (15), the degree of return from specialization (v) has a positive eect
on the marginal value of consumption. Equation (16) shows that the marginal
value of new varieties is equal to the monopolist prot divided by the degree of
returns from specialization (v).

3.5.2 Intermediate goods rms

In the intermediate goods sector, the monopolist maximizes the following prot
function:

   
max π = pj xjt − e
c I˙t + w2t xjt (17)

 
Where c I˙ is
e the cost associated to the information used in the production
 
of intermediate goods, then c I˙ ,
w1t = e that means that the monopoly pays

indirectly for the production of information.

The elasticity is:

1
ε=− (18)
1 − αι

In absolute value the elasticity is between (1, ∞) .When ι tends ∞ the elas-
to
ticity will be unitary, when it tends to 1 it will be determined by α. If α tends
to 1 the elasticity tends to ∞. In general, an increase in (ι) makes (18) less

12
elastic, then this equation shows the source that cause the ineciency in the
decentralized economy.

Then, the monopoly price is:

   
c I˙ + w2t
ι e
p = pj = (19)
α
Finally, the markup is

ι
markup = −1
α
The markup price indicates that the monopolist takes advantage of the infor-
mation in the economy.

3.5.3 Final goods sector

The nal sector produces the nal output Yt choosing the amount of interme-
diate goods X and the technology from the range [0, nt ]. Then, maximizes the
following production function:

 αι
ˆ  α
 n
ι
M ax Yt =  xjt dj 
0

X
Because xj = n then:

M ax Yt = nv Xt

Also, the nal goods sector is competitive. Hence, the price for intermediate
goods in terms of the nal goods is equal to their marginal productivity. This
is:

∂Y v
= p = (nt ) t (20)
∂X
Also, the information sector is competitive. Then, the free entry condition is:

 
c I˙ + w2t
e
vt = if ṅ > 0 (21)
nt

13
3.5.4 Slutsky approach of the information framework

To make stronger the analysis of the solutions of (14), it is appropriate describes

the information framework in the decentralized economy by a Slutsky decompo-
sition of (2). In Young's approach the demand is one of the channel that boost
specialization.

In this economy the economic growth rate is given by the balance growth path:

ṅ
g∗ = gy = gc = gn =
n
The Slutsky decomposition is:

Y V Y
 =h i  αι  −   αι 2
ι Pn pxj

1+ Pn
Pn pxj Pn pxj

p + pxj
α i=1 pxi −pxj j=1 i=1 pxi −pxj
xj
i=1 pxi −pxj
pxj + Pn
| {z } i=1 pxi −pxj
(A)
| {z } | {z }
(B) (C)

(A): Total eect

(B): There are two types of substitutions:

ˆ Substitution by innovation eect: An increase in the price of xj reduce its

demand and this demand is absorbed by new varieties.

ˆ Standard substitution: An increase in the price of xj reduce its demand

and this demand is absorbed by other varieties.

(C): Young's eect: An increase in income is the result of the incorporation

of new varieties within the economy. This implies an extension of the market
size. Hence, the new varieties boost the demand for xj in consequence raising
the specialization of the economy.

Therefore an increase in (ηι) could enhance the economic growth cycle described
in gure 2 through Young's eect channel.

3.5.5 Decentralized solution

The proposition 2 shows the decentralized allocation solution

Proposition 2
The decentralized allocations for this economy are characterized by:

α (ηιL + ρ − µ)
Xt∗ = L∗2 = (22)
ι − α (ηι − 1)

14
 α (ηιL + ρ − µ)
L∗1 = L − (23)
ι − α (ηι − 1)

vt α (ηιL + ρ − µ)
Yt∗ = Ct∗ = (nt ) (24)
ι − α (ηι − 1)

      
ṅ αηι α (ρ − µ)
g∗ = = max 0, ηι L 1 − − −µ (25)
n ι + α (ηι − 1) ι + α (ηι − 1)

As in the central planner solution, equations (22) and (23) show how eort is
distributed across sectors. Important implications can be observed from (25).
First, the ICT index and the accumulation rate have a positive eect on the
growth rate. Second, as a dierence from (13), the growth rate depends on the
αηι
elasticity values. In equation (25) the term
ι+α(ηι−1) represents the ineciency
associated to the use of information.

A reduction in the information index ι implies an increase in the amount of

intermediate goods X ∗ , this amplies the economy complexity. When ηι > 1 the
population eect on growth is amplied by the ICT parameters. This eect is
higher than the eect generated by the ineciencies, then the economy grows
at a rate that could be even higher than the population growth rate.

4 Comparing central planner and decentralized market solution

This section makes a comparison of the decentralized and the central planner
growth rates. Also, each one will be compared with the results obtained by
Benassy (1998).

Despite that each rate can be boosted by ηι, a priori cannot be said that the
central planner solution is higher than the decentralized solution due to the fact
that the rst one depends on the value of varieties v. In addition, in Benassy,
v has an important eect on the central planner solution increasing the social
return. However, rather than create a boost eect, v can just reduce the negative
eect from the discount rate ρ. Then, there is no boost factor in Benassy.

To make the growth rates of both solutions comparable and following Benassy
it is assumed a particular value for v equal to the monopolistic markup in
equation(13), then:

Table 2: Results

Central Planner Decentralized Equilibrium Central Planner (Benassy) Decentralized Equilibrium (Benassy)

  h    i h i
ρα αηι α(ρ−µ) 1 (1−α)L (1−α)L
ηιL − (ι−α) − µ ηι L 1 − ι+α(ηι−1) − ι+α(ηι−1) − µ 1−α a − αρ a − αρ

15
In this work the decentralized solution is lower than the central planner due
to the ineciency of using information. In addition, in Benassy's decentralized
solution, the growth rate is strongly supported by the population, then it is
possible that in the information society the economy grows faster. In fact, when
ηι > 1 the economy has gains from specialization and generates a scale eect
on growth. On the contrary, there is a complexity diseconomy scenario where
there are too many intermediate goods and the information ineciency leads to
a growth rate even lower than Benassy.

5 Concluding remarks

The evolution until the arrival of the information society has endowed the econ-
omy with a structure that boosts knowledge transmission. In this context, this
work states an endogenous growth model where the ICT infrastructure and the
agent's capacity play an important role. The results show the conditions where
the economy can grow faster than in previous steadies of societies (agricultural
and industrial societies).

A strong combination between agents capacity to acquire information and the

ICT infrastructure lead the economy to a high-level of gain from specialization
and the knowledge spillover is boosted. On the contrary, it makes the economy
more complex and the knowledge spillover is reduced. In addition, the use of
information increases the ineciencies generated by the monopolistic competi-
tion.

It is well known, that in endogenous growth theory, investment in human capital

is the key for an unbounded growth rate. This model uses a very specic kind of
human capital that is the skill or the capacity of agents to acquire and process
information using ICTs. The International Telecommunication Union measures
the development of the information society in three broad categories: access,
use, and skills. Then, a strong investment in ICTs can lead a country to a
complexity diseconomy scenario, for this reason, to capture the potential benets
of ICTs, governments need to address some resources to improve the agent's
capacity to acquire information while at the same time that they invest in ICT
infrastructure.

16
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18
Appendix

ˆ Daniel Bell Comparative Scheme

Table 3: Comparative scheme

ˆ Proof proposition 1

The Hamiltonian for this program is:

H = e−ρt (ln (Xt ) + vt ln(n)) + λt (ηιn (Lt − Xt ) − nµ)

FOC:

 
−ρt 1
[Xt ] : e = λt ηnι (26)
xt

Taking the logarithm and deriving with respect to time

Ẋt ṅ λ˙t
−ρ − − = (27)
Xt nt λt

vt e−ρt
[Nt ] : + ληι (L − Xt ) − λµ = −λ̇
n

vt e−ρt λ̇
+ ηι (L − Xt ) − µ = − (28)
λn λt

19
Replacing (28) in (26)

λ˙t
= vt ηιX + ηι (L − Xt ) − µ (29)
λt

And replacing (29) in (27)

Ẋt ṅ
−ρ − − = −vt ηιX − ηι (Lt − X) + µ
Xt nt

The optimal growth rate g∗ = ṅ Ẋ

n is given by X =0 then the steady state value
for X is:

ρ
Xt∗ = (30)
vηι

Finally, if (30) is introduced in (7) it can be obtained the optimal growth rate
in steady state

   
ṅ ρ
g = = max 0, ηι L − −µ (31)
n vηι

ˆ Proof proposition 2

The Hamiltonian for this program is

 
Wt L + πn − Ct
H = e−ρt ln (Ct ) + λt
v

FOC:

vt
[Ct ] : e−ρt =λ
ct

Taking the logarithm and deriving with respect to time

v˙t c˙t λ˙t

−ρ + − = (32)
vt ct λt

λt π
[n] : = −λ˙t (33)
vt

Replacing (33) in (32)

20
 c˙t π v˙t
= + −ρ (34)
ct vt vt
From (20 )and (29)

π p Xt
= (ι − α) (35)
vt vt nt
Combining (19) with (25)

π Xt (ι − α)
= (36)
vt α
From (35),(36) and (27)

v̇t ṅt
= (vt − 1) (37)
vt nt
Taking the logarithm of (3) and deriving with respect to time

Ċt ṅt Ẋt

= vt + (38)
Ct nt Xt
Finally, combining (7),(34),(37 ) and (38) it can be obtained the dynamic equa-
tion for X

ṅt Ẋ Xt (ι − α) ṅ
vt + = + (vt − 1) − ρ
nt X α n

Ẋ Xt (ι − α)
= − ηι (L − Xt ) + µ − ρ
X α
The optimal growth rate g∗ = ṅ Ẋ
n is given by X = 0 , then the steady state value
for X is:

α (ηιL + ρ − µ)
Xt∗ = (39)
ι + α (ηι − 1)
Adding L to both sides of (39)
 
α (ηιL + ρ − µ)
(L − Xt ) = L − (40)
ι + α (ηι − 1)
Finally, introducing (40 ) in (7)

      
αηι α (ρ − µ)
g ∗ = max 0, ηι L 1 − − −µ (41)
ι + α (ηι − 1) ι + α (ηι − 1)

21