Transitional dynamics in an R&D-based growth model with natural resources

• We prove uniqueness and existence of optimal path and convergence to steady state.
• We fully characterize the dynamics of the social planner’s optimal path.
• Dynamic transition to optimal steady state is different for each type of resources.
• Decentralized equilibrium is suboptimal from social planner’s perspective.
• Productivity of R&D sector is essential for sustaining positive long-run growth.

In this paper, we prove the existence and uniqueness of the optimal path for a resource endowed economy with R&D. This path converges to an optimal steady state, which is a saddle point, for each type of resources (renewable or non-renewable). In this steady state, a finite size resource sector coexists with other continuously growing sectors. In comparison, the corresponding decentralized equilibrium is suboptimal and there is either over- or under-investment in R&D from the social planner’s perspective. At optimum, positive long-run growth will be sustained regardless type of resources used.