33
A Model of a Corporatist Economy with Increasing Returns

To summarize the ideas presented in the last chapter, consider a model economy with a few industrial sectors, the number of which we set to two for illustrative purposes. Call them sector 1 and sector 2. Each sector produces one good, so that the product market is made of two goods, good 1 and good 2. Assume that there are many entrepreneurs in both sectors; we can, however, normalize their number to unity in both sectors in order to make the exposition simple. At this level of generality we may think that each firm is owned by one individual, who is both the entrepreneur and the consumer of the model economy. Assume further that there are economies of scale associated with the accumulation of capital. If K and H are the capital stocks of the representative firms in both sectors,8 let the firms' production technologies be characterized by the linear production functions
X = AK (33.1)
and
Y = BH, (33.2)
where X and Y are the outputs of the respective sectors and A and B are parameters that summarize the level of technological knowledge. These parameters, however, depend on the overall level of the entire industry's capital stock, so that
A = Ka (33.3)
and
B = Hb, (33.4)
where a and b are positive parameters on the range (0,1). The industry-wide production functions exhibit increasing returns to

____________________
8
One may think of K and H as a mixture of equipment and human capital, for example.

-214-

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