State Dependence in Optimal Factor Accumulation

Abstract

A general model of optimal factor accumulation over an infinite horizon is presented in which the steady state depends on initial conditions and on the history of the system. In contrast to conventional results, any change in initial conditions or any temporary shock in the convergence process will in general change the optimal steady state. The result is shown to arise, when the discount rate is positive, from standard assumptions made about the technology of converting heterogeneous factors from one type to another.