Optimizing International Investment and Trade Under Golden Rule Conditions.

In a two-country, two-factor world, each is assumed to choose a golden rule path, but these paths differ because of divergent growth rates for labor (in efficiency units). In order to maintain these, it becomes necessary to impose a tax on the return to foreign-owned capital equal to the difference between the lower foreign rate and the higher home rate of the capital-importing country. It is also necessary to prevent undercutting of this difference in capital returns via adjustment of domestic production, as in the HOLS theorem. This is done by means of a supporting tariff on trade. When foreign investment also involves the transfer of technology, the tax is accordingly reduced. It is also shown, using the calculus of variations, that if and only if social planners have a discount rate on future consumption of zero does the golden rule follow. [ABSTRACT FROM AUTHOR]