The dynamic interactions of growth and depreciation

The determinants of depreciation function are neglected concept in the theory of economic growth. This study investigates interactions between capital accumulation and the evolution of depreciation functions in a dynamical Solow model. The model introduces non-linear depreciation functions into the theory of growth. Two effects of congestion and recycling influence depreciation towards opposing outcomes: (1) poverty (depreciation) trap: the entire investments can only cover the increasing depreciation; (2) a type of endogenous /sustainable growth that capital accumulation and technological progress give rise to an everlasting growth via decreasing depreciation power. Therefore, poverty trap can be avoided and prosperous sustainable/ endogenous growth might be achieved if congestion of obsolete physical capital is prevented and depreciation power is lowered. To this end, diversification of economic activities, waste management, recycling, and investment in higher-quality durable goods are recommended