Distribution and Endogenous Growth: The Two-Class Pasinetti Model

The paper extends the two-class Pasinetti model with workers and capitalists to allow for endogenous growth. Sustained per-capita growth results from positive externalities of investment which for its part only occur if workers devote time to education so that an efficient use of new machines is guaranteed. It is shown that there exists a unique balanced growth path which is a saddle point. The effects of raising education on the growth rate as well as on the income distribution between workers and capitalists are studied as well. It is demonstrated that education affects the balanced growth rate and, thus, the income of workers. However, it does not affect the ratio of workers' income relative to the income of capitalists.