Flexibility, Investment, and Growth

30 Pages Posted: 15 Jan 2007 Last revised: 23 Jan 2022

See all articles by Giuseppe Bertola

Giuseppe Bertola

University of Turin - Department of Economics

Date Written: October 1991

Abstract

This paper proposes a model of diversifiable uncertainty, irreversible investment decisions, and endogenous growth. The detailed microeconomic structure of the model makes it possible to study the general equilibrium effects of obstacles to labor mobility. Labor mobility costs reduce private returns to investment, imply a slower rate of endogenous growth, and unambiguously lower a representative agent's welfare. If external effects are disregarded, restricted labor mobility may be consistent with higher wage levels in full employment equilibrium: this may help explain why labor's political representatives often tend to decrease labor mobility in reality, rather than to enhance it. The lower growth rate of "disembodied" productivity, however, implies slower wage growth in equilibrium, with negative welfare effects even for agents who own only labor.

Suggested Citation

Bertola, Giuseppe, Flexibility, Investment, and Growth (October 1991). NBER Working Paper No. w3864, Available at SSRN: https://ssrn.com/abstract=473989

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