The kindergarten rule of sustainable growth: a Schumpeterian Approach

Abstract

In this thesis, I construct a dynamic economic growth model that takes into account environmental concerns, and search for a difference in the pattern of environmental quality when technological progress is taken to be endogenous. In order to do so, I extend Brock and Taylor's (2003) model. In their model, Brock and Taylor define pollution production and abatement explicitly by considering pollution as an output of both production and abatement activities, and suggest a new approach to pollution convergence, which they name as the "Environmental Catchup Hypothesis". Their theoretical framework relies on AK production function where production increase depends significantly on capital increase. Since pollution is generated via production, analyzing capital stock as a source of pollution is necessary which raises attention to the types of capital such as physical and knowledge capital where the latter is cleaner compared to the former. I add to the model of Brock and Taylor (2003) by applying endogenous technological progress using the Schumpeterian approach, where I include those two types of capital separately in the functional form. With this approach, I observe that the possibility to attain a sustainable balanced growth path increases as technology improves steadily. Moreover, I show that the rise in technological growth causes pollution growth to decline. Furthermore, I solve the Environmental Catch-up formulation which illustrates that as income grows, environmental quality deteriorates much more in initially poor countries compared to the rich ones, and as economic growth proceeds, the differences in their environmental quality narrow and converge to each other in the long run.