On the Invariance of the Rate of Return to Convex Adjustment Costs

21 Pages Posted: 13 Feb 2003 Last revised: 7 Aug 2022

See all articles by Andrew B. Abel

Andrew B. Abel

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: December 2001

Abstract

The Modified Golden Rule, which relates the rate of return on capital and the growth rate of the capital stock along long-run growth paths that maximize the utility of a representative infinitely-lived consumer, is invariant to the introduction of convex capital adjustment costs. Therefore, along balanced growth paths in neoclassical optimal growth models with an exogenous long-run growth rate of capital, the rate of return is invariant to the introduction of convex adjustment costs, though the capital-labor ratio is reduced along such paths. In AK models, convex adjustment costs reduce the growth rate and rate of return on capital.

Suggested Citation

Abel, Andrew B., On the Invariance of the Rate of Return to Convex Adjustment Costs (December 2001). NBER Working Paper No. w8635, Available at SSRN: https://ssrn.com/abstract=293248

Andrew B. Abel (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-4801 (Phone)
215-573-7244 (Fax)

HOME PAGE: http://finance.wharton.upenn.edu/~abel/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States