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.