Factor Income Distribution and Endogenous Economic Growth - When Piketty meets Romer

  • Date:

    May 18th, 2017

  • Author:

    University of Luxembourg

  • Speaker:

    Andreas Irmen 

  • Abstract:
    We scrutinize Thomas Piketty’s (2014) theory concerning the relationship between
    an economy’s long-run growth rate, its capital-income ratio, and its factor income
    distribution put forth in his recent book Capital in the Twenty-First Century. We find that
    a smaller long-run growth rate may be associated with a smaller capital-income ratio.
    Hence, the key implication of Piketty’s Second Fundamental Law of Capitalism does not
    hold. In line with Piketty’s theory a smaller long-run growth rate may go together with a
    greater capital share. However, the mechanics behind this result are the opposite of what
    Piketty suggests. Our findings obtain in variants of Romer’s (1990) seminal model of
    endogenous technological change. Here, both the economy’s savings rate and its growth
    rate are endogenous variables whereas in Piketty’s theory they are both exogenous parameters.
    Including demographic growth in the spirit of Jones (1995) shows that a smaller
    growth rate of the economy may imply a lower capital share contradicting a central claim
    in Piketty’s book