The dynamic efficiency of the Ramsey model with endogenous labour participation rate

This paper incorporates the hypothesis of labour participation rate into the Ramsey model. It is shown that the economy can be dynamically inefficient if the average productivity of capital is greater than the sum of the rate of time preference, the population growth rate, the depreciation rate and the marginal rate of substitution between labour and consumption. The modified golden rule holds when the wage rate is equal to the marginal rate of substitution between labour and consumption. However, there is no guarantee that it will happen, since labour supply is driven by capital allocation decisions.