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1. The model
Introduction
In this section we consider a human-capital-based endogenous growth model. The standard approach is due to
Uzawa (1965) and Lucas (1988) and is hence sometimes called Uzawa-Lucas model. We focus on a human-capital-
based growth model as formulated by Benhabib and Perli (1994).
Final output is produced by employing physical capital and human capital. The accumulation of human capital uses a
separate technology. It is assumed that the production of human capital is human-capital intensive. In fact, human
capital is the sole input factor used in the education sector. This formulation can be considered as an approximation
of the assumption according to which education is human capital intensive. It is further assumed that the technology
available to the education sector exhibits constant returns to scale. This last assumption is, of course, critical for the
generation of sustained growth.
The model
The dynamic problem of the representative agent may be expressed as follows
max ‡
¶ C 1-s -1
‰-r t „ t
8C,u< 1-s
s.t. K = A K a Hu HL1-a Ha - C
0
° g
with A, g > 0 and 0 < a < 1
° (1)
H = b HH1 - uL with b > 0
KH0L = K0
HH0L = H0
COMMENTS
[1] This is the problem of the representative agent (producer-consumer household). Therefore, the average stock of
human capital Ha is taken as exogenous. The social planner would consider Ha as being endogenous.
[2] There are two control variables, namely the rate of consumption C and the time allocation variable u. Moreover,
there are two state variables, the stock of physical capital K and the stock of human capital H .
[3] Notice that there is a positive externality associated with the average stock of human capital Ha in final output
production. This positive externality is, however, not necessary to generate sustained growth.
2 Uzawa_Lucas_complete.nb
First-order conditions
As usual, we set up the current-value Hamiltonian
Off@General::spellD
Off@General::spell1D
and then derive the necessary first-order condition based on the Hamiltonian set up above
foc1 = ∂C HH 0;
foc2 = ∂u HH 0;
foc3 = λK ' == −∂K HH + ρ λK;
foc4 = λH ' == −∂H HH + ρ λH;
foc5 = K ' == ∂λK HH;
foc6 = H ' == ∂λH HH;
HlistFoc = 8foc1, foc2, foc3, foc4, foc5, foc6<L êê ColumnForm
−H β λH + A H Haγ Kα HH uL−α H1 − αL λK
C−σ − λK 0
HH
0
−C + A Haγ Kα HH uL1−α
λH
H H1 − uL β
K
H
COMMENTS
[1] For remarks on the TVC and the sufficiency conditions see Benhabib and Perli (1994, pp. 117/118).
°
[2] As usual, the differential equation in C (the KRR) results when FOC1 is differentiated w.r.t. time and l is substi-
tuted according to FOC3.
H1 - a + gL H + a K - a u + lK - H - lH n 0
` ` ` ` ` `
(5)
` ` ` `
The growth rates H , K , lK , and lH can be substituted according to
`
H = bH1 - uL (6)
K = A K a-1 Hu HL Ha - C ê K
` 1-a g
(7)
`
lK = r - A K -1+a H 1-a+g u1-a a (8)
lH = r - H1 - uL b - A H g-a K a u1-a H1 - aL
` lK
= r- b (9)
lH
lK Hb
A K a H -a+g+1 u-a H1-aL
where the last equation uses = (from FOC2)
lH
H1 - a + gL b H1 - uL - a C ê K - a u - bH1 - uL + b n 0
`
(11)
H1 - a + gL b H1 - uL - a C ê K + b u n a u
`
(12)
a u = H1 - a + gL b H1 - uL - a C ê K + b u
`
(13)
H1 - a + gL b
H1 - uL - C ê K + u
° b
u=u (14)
a a
H = b H1 - uL H
°
(16)
Hb - rL
1-a+g
H1 - a + gL s - g
gK = gC = g = (19)
1-a
gH = g (20)
1-a+g
gu = 0 (21)
4 Uzawa_Lucas_complete.nb
2. Model analysis
h = b H1 - uL h - gH h
°
(23)
Hb - rL
1-a+g
H1 - a + gL s - g
gK = gC = g = (26)
1-a
gH = g (27)
1-a+g
This dynamic system in scale-adjusted variables does not define a unique stationary solution. To determine an (initial)
steady state, we are forced to set one of the endogenous variables at a specific value, say kH0L = k0 . This implies that
the above system defines a continuum of steady states (a center manifold), i.e. for each values of k0 there is a different
è è è
set of steady state {h, c , u}.
h ê h = b H1 - uL - gH = 0
° è
Ø u (29)
è gH
u=1- (32)
b
Uzawa_Lucas_complete.nb 5
Hg - aL b
k
H1 - uL + -
b è
è c
Å =0 (33)
a a k
The problem then boils down to solving the following two equations w.r.t. h and k
è
è c
A k a-1 h1-a+g u1-a - d - Å - gK = 0 (34)
k
<< Graphics`ImplicitPlot`;
General::obspkg :
Graphics`ImplicitPlot` is now obsolete. The legacy version being loaded
may conflict with current Mathematica functionality. See
the Compatibility Guide for updating information. à
β + Hγ − αL gH
equ1 = IA kα−1 h1−α+γ u1−α − ck − gK == 0M ê. u −> ê. ck −> ê.
β − gH
β α
gK ê. gK −> Hβ − ρL;
1−α 1−α+γ
H1 − α + γL σ − γ
gH −>
1−α+γ
equ2 =
β + Hγ − αL gH
Iα A kα−1 h1−α+γ u1−α − ρM − gC == 0 ê. u −> ê. ck −> ê.
1 β − gH
σ β α
gK ê. gC → gK ê. gK −> Hβ − ρL;
1−α 1−α+γ
H1 − α + γL σ − γ
gH −>
1−α+γ
curve1 = ImplicitPlot@equ1 ê. paramFinal, 8k, 0.0001, 1<,
8h, 0.0001, 1<, AspectRatio → 1, AxesLabel → 8"k", "h"<,
PlotRange → 880, 1<, 80, 0.7<<, PlotLabel → "equ.H35L"D;
curve2 = ImplicitPlot@equ2 ê. paramFinal, 8k, 0.0001, 1<,
8h, 0.0001, 0.8<, AspectRatio → 1, AxesLabel → 8"k", "h"<,
PlotRange → 880, 1<, 80, 0.7<<, PlotLabel → "equ.H36L"D;
The two curves coincide. This means that there is a continuum of stationary solutions. The above curve illustrates the
center manifold. More precisely, the above displayed curves illustrates (the projection of) the center manifold in (k , h)-
plane.
h = b H1 - uL h - gh h
°
(43)
Hb - rL
1-a+g
H1 - a + gL s - g
gK = gC = g = (46)
1-a
gH = g (47)
1-a+g
uα−1 ê. u −> 1 −
σg +ρ gH
solh = SolveBkα−1 h1−α+γ == , hF;
αA β
Solve::ifun :
Inverse functions are being used by Solve, so some solutions may not be found;
use Reduce for complete solution information. à
Hγ − αL
H1−αL
Generic notation
Here we switch to a generic notation by defining and applying a substitution list. X -type variables denote dynamic
state variables; W -type variables denote dynamic jump variables; Y -type variables denote jump variables, which are
determined by static equations.
subsVar = 8k −> X@1, jD, h −> X@2, jD, c −> W@1, jD, u −> W@2, jD<;
, 8i, 1, nX<F,
X@i, j − 1D + X@i, jD
subsList1 = JoinBTableBX@i, jD →
2
, 8i, 1, nW<FF;
W@i, j − 1D + W@i, jD
TableBW@i, jD →
2
equMain =
Table@Join@Table@X@i, jD − X@i, j − 1D, 8i, 1, nX<D,
Table@W@i, jD − W@i, j − 1D, 8i, 1, nW<DD − HdynEquScale ê. subsList1L,
8j, 1, n<D;H∗discretization: HnX+nWL∗n equations∗L
Rootfinding
80.203, Null<
2.77556 × 10−16
10 Uzawa_Lucas_complete.nb
0.885
0.880
0.875
t
10 20 30 40 50 60 70
h
0.4404
0.4402
0.4400
0.4398
0.4396
0.4394
0.4392
t
10 20 30 40 50 60 70
Uzawa_Lucas_complete.nb 11
0.2955
0.2950
0.2945
t
10 20 30 40 50 60 70
0.718
0.716
0.714
0.712
t
10 20 30 40 50 60 70
Notice that the final steady state cannot be determined (not even numerically) without calculating the equilibrium
trajectory. It results from the transition process and hence depends on initial conditions ( kH0L and hH0L). From each
point in (k , h)-plane there is a unique trajectory converging to a specific point on the center manifold. The resulting
point on the center manifold determines the level of the BGP. Consequently, the level of the BGP (in original vari-
ables) depends on initial conditions (this statement should not come at a surprise).
h = b H1 - uL h - gH h
°
(49)
Hb - rL
1-a+g
H1 - a + gL s - g
gK = gC = g = (52)
1-a
gH = gK (53)
1-a+g
Solve::ifun :
Inverse functions are being used by Solve, so some solutions may not be found;
use Reduce for complete solution information. à
::h → >>
β Hγ H−1+σL+σ−α σL
1−α+γ
H1 - uL b -
H1-aL H b-rL
H-a+g+1L s-g
0 0
A c h-a+g+1 k a-2 u1-a Ha-1L a A c hg-a k a-1 u1-a a H-a+g+1L A h-a+g+1 k a-1 u1-a a-r H-a+g+1L H b-rL
H-a+g+1L s-g
-
s s s
cu u
0 -Å
k2 k
14 Uzawa_Lucas_complete.nb
Hγ − αL
H1−αL
Ha-1L H b-rL
-a+g+1
+1 HHa-1L b s+g Hr- b sLL -a+g+1
1
J1 - N
a
b Hg Hs-1L-a s+sL H1-aL H b-rL H-a+g+1L H b
k 1-a b
1-a
A a HHa-1L r+ b Ha-g-1L Hs-1LL b HH-a+g+1L s-gL H-a+g+1L s
A k a-1 a -
Ha-1L H b-rL
-a+g+1
+1 HHa-1L b s+g Hr-b sLL -a+g+1
1
a
b Hg Hs-1L-a s+sL H1-aL H b-rL H1-aL Hg-aL Hb-
k 1-a b
A k a-1 Ha-1L
A a HHa-1L r+ b Ha-g-1L Hs-1LL b HH-a+g+1L s-gL H-a+g+1L s-g
1-a
1- b+
s
H1-aL H b-rL H1-aL Hg-aL H b-rL
b HH-a+g+1L s-gL H-a+g+1L s-g
1- b+
ka
eigenvalues
0.3
0.2
0.1
k
20 40 60 80 100
−0.1
−0.2
−0.3
There are two positive ("unstable") eigenvalues and one negative ("stable") eigenvalue. One eigenvalue is zero, which
results from scale adjustment. Notice that the eigenvalues do not seem to change as k changes (i.e. the stability
properties along the center manifold remain the same). Since there are two jump variables and two unstable eigenval-
ues, the center manifold is (locally) saddle-point stable.