A Note on the Stability of Fully-Endogenous Growth with Increasing Returns and Exhaustible Resources

Abstract

We introduce an exhaustible natural resource as an essential input in a general R&D-based endogenous growth model, which makes increasing returns to scale to man-made inputs com- patible with non-explosive sustained growth. The instability problem usually associated with increasing returns is overcome thanks to the existence of imperfect markets in a decentralized economy. The economy comprises two separate sectors: nal output and R&D, both directly or indirectly dependent on the natural resource. Without the requirement of any knife-edge assumption, we prove that growth is fully endogenous and saddle-path stable.