Neoclassical growth with microfoundations (Q914537)

The model presented in the paper is a neoclassical growth model with microeconomic foundations that shows the interdependence of individual decisions and macroeconomic variables. In recent years several attempts have been made to define population growth as an endogenous variable in a macroeconomic model using an altruistic utility function. This paper presents a generalization of these attempts. It starts on the microeconomic level where a representative household or family decides on life-cycle consumption and children. Furthermore a microeconomic model of a representative firm is used. By optimizing utility and profit, behavioural functions are derived. When adding up the restrictions to both optimization problems Walras' Law can be demonstrated. The model is formulated in discrete time. Savings or investment increase the potential to produce only in the next period and children raised offer their labour in the next time period. The decisions of the family determine the future growth of labour and capital. Using the behavioural functions of the microeconomic agents it can be shown that a stable steady-state exists. The model establishes a simultaneous relation between important macroeconomic variables as capital-intensity, the rate of interest and the microeconomic variables and decisions concerning capital accumulation and the number of children.