Multisector Growth Models
Multisector models are essential ingredients for general equilibrium analysis of an economy over time. They have been used extensively in the literature whenever an adequate description of the relevant issues makes it inappropriate to use aggregative models for formal analysis. A study of optimal accumulation of capital goods or optimal depletion of exhaustible resources is a key to developing a theory of economic planning. The specific results can also be viewed from a different perspective. The idea that markets and prices can be used to achieve efficiency in a decentralized manner has been central to economics. The fundamental theorems of ‘new’ welfare economics identify conditions under which competitive economies attain an efficient or Pareto optimal allocation of resources. It is natural to enquire whether in dynamic models such a connection between optimality and competitive prices can be established. One possibility is to use the basic static model and treat the same good at different points of time as different commodities. While such an approach is not entirely shorn of merit, a fundamental paper by Malinvaud (1953) suggested that when economic activity does not terminate at a known date, the outcome of a period-by-period competitive process may fail to be optimal. Indeed, the possibility (or otherwise) of designing an informationally decentralized resource allocation mechanism that leads to optimal outcomes has been the subject of considerable speculation and over the last thirty years it has become a ‘classical’ problem in dynamic models with an infinite horizon. In what follows, I shall review some recent results that throw new light on this topic.
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