Abstract: 

"We illustrate our method through several canonical examples. First, we consider a non-concave neoclassical growth model, featuring a production function with an inflection point. We show how the $\Pi$ function directly identifies stable versus unstable long-run capital stocks. Next, we examine a “rational fitness” model, in which exercise raises the future marginal enjoyment of exercising, leading to potentially multiple fitness levels that can persist. Contrary to the classical approach by Becker and Murphy, which assumes concavity, our framework reveals when a low-fitness “couch potato” steady state and a high-fitness “gym habit” steady state can coexist, as well as the initial conditions that converge to each. Finally, we turn to increasing returns in an open economy setting, where the home country’s productivity can grow endogenously with employment. Again, the $\Pi$ function highlights the possibility of multiple steady states, including “good” and “bad” equilibria, and clarifies which of these are stable".

For further information please contact michela.raganato@unibocconi.it