Optimal Growth with Scale Economies in Overhead Capital

Following closely the approach to optimal economic growth taken in the work of Frank Ramsey (1928), a highly simplified two-sector model is presented in which the “overhead capital” sector exhibits increasing returns to scale. Basic properties of the optimal growth path are discussed and the optimal policy is explicitly demonstrated for a special case. From an economic standpoint, the model might be relevant in bearing on some issues of development programming. Mathematically, this kind of a model has an interesting structure because it is a combination of convex and concave sub-problems.