Capital utilization, economic growth and convergence

This paper examines the implications of capital utilization for the dynamics of growth and convergence. Optimal decisions by economic agents regarding the utilization of capital lead to empirically plausible speeds of convergence in one-sector models of economic growth, thereby providing a simpler alternative to the adjustment costs and multiple capital goods frameworks. The sensitivity of depreciation to capital utilization leads to “less than full ” utilization of capital by the economic agent, a result consistent with empirical facts. The relationship between the rate of depreciation and capital utilization, embodied in the variable marginal benefits and costs of capital accumulation along the transition path, plays a crucial role in slowing down the speed of convergence to the steady state. By assuming a constant depreciation rate and full capital utilization, standard growth models may be significantly overstating the magnitude of the steady-state equilibrium. Finally, differences across countries in the extent to which agents internalize the capital utilization decision along the transition path may lead to differences in the speed of adjustment to the steady-state equilibrium, even for countries that have similar structural and initial conditions