Idle Capital and Long-Run Productivity

This paper examines the joint determination of long-run income per worker and capital utilization. Comparatively low (optimal) rates of capital utilization may arise in poor economies in response to weak underlying structural characteristics. The quantitative implications of variable capital utilization are also explored. It is demonstrated that adding endogenous capital utilization to the Solow model implies a rate of convergence in line with empirical estimates and that controlling for capital utilization has important consequences for the results stemming from cross-country growth and levels accounting.