A Bottleneck Capital Model of Development
By Jordan Rappaport
First Version: November 2001; Last Revised: July 2005
RWP 01-10
Research Division
Federal Reserve Bank of Kansas City
Abstract
A simple augmentation of the Ramsey-Cass-Koopmans growth model allows it to match observed transitions by initially poor economies. A high-convexity installation cost directly dampens investment demand for a first capital input. The resulting scarcity acts as a bottleneck, strongly dampening demand for investment in a complementary capital input as well. The match to observed transitions holds both for narrow and broad interpretations of capital. In either case, the bottleneck capital's share of factor income need not be large.
Keywords: General Aggregate Models; One, Two, and Multisector Growth Models
JEL Codes: E100, O410
Jordan Rappaport is a senior economist in the Economic Research Department of the Federal Reserve Bank of Kansas City. An earlier version of this paper was circulated under the title, “Convex Adjustment Costs, Complementary Capital, and Neoclassical Transition Dynamics.” The author would like to thank Larry Ball, Russell Cooper, Steven Durlauf, John Fernald, John Haltiwanger, Joe Haslag, Karsten Jaske, Tim Kehoe, Robert King, Peter Klenow, David Laibson, Richard Rogerson, Stephen Turnovsky, David Weil, Jonathan Willis, Kei-Mu Yi, and seminar participants at the University of Virginia, Iowa State University, and the Federal Reserve Banks of Cleveland, Kansas City, and Minneapolis. Taisuke Nakata provided excellent research and editorial assistance. The views expressed herein are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of Kansas City or the Federal Reserve System. Supplemental materials to the paper are available from www.kansascityfed.org/Econres/staff/jmr.htm.
Rappaport email: jordan.rappaport@kc.frb.org