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A Renewal Model of Economic Growth: The Continuous Case

John S. Chipman

Abstract

This paper analyzes a one-commodity model in which alternative investment projects are characterized by return functions indicating the output intensities over time resulting from an initial unit investment. Saving is generated partly by households as a constant fraction of net income, and partly by business firms in accordance with a depreciation (or replacement) policy. It is shown that when a "declining value depreciation policy" is adopted, the ordering of consumption streams in terms of their present values, at any fixed interest rate for which these converge, induces an ordering of investment projects in terms of their internal rates of return. The same ordering of projects is also induced by applying the overtaking criterion to the consumption steams.