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Assessing Dynamic Efficiency: Theory and Evidence

Andrew B. Abel, N. Gregory Mankiw, Lawrence H. Summers and Richard J. Zeckhauser
The Review of Economic Studies
Vol. 56, No. 1 (Jan., 1989), pp. 1-19
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2297746
Page Count: 19
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Assessing Dynamic Efficiency: Theory and Evidence
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Abstract

The issue of dynamic efficiency is central to analyses of capital accumulation and economic growth. Yet the question of what characteristics should be examined to determine whether actual economies are dynamically efficient is unresolved. This paper develops a criterion for determining whether an economy is dynamically efficient. The criterion, which holds for economies in which technological progress and population growth are stochastic, involves a comparison of the cash flows generated by capital with the level of investment. Its application to the United States economy and the economies of other major OECD nations suggests that they are dynamically efficient.

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