Economics Letters 3 (1979) 25-30 0 North-Holland Publishing Company zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIH ON PERMANENT EFFECTS OF TRANSITORY PHENOMENA IN A SIMPLE GROWTH MODEL Allan DRAZEN * zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFED University of Chicago, Chicago, IL 60637, USA Received 5 August 1979 It is demonstrated that, because of learning-bydoing in the production process, transitory phenomena, such as market disequilibrium, can permanently affect long-run production tech- niques and the steady-state path of capital accumulation. 1. Introduction The theory of steady-state paths of capital accumulation is largely characterized by models in which the properties of the steady-state growth path are invariant to transitory phenomena in the approach to steady-state. That is, for given values of certain underlying parameters such as rates of population growth, technical progress, or saving, transitory phenomena (temporary factor rationing, temporary unemploy- ment, or destruction of a portion of the capital stock) during the convergence to steady-state may affect the likelihood of convergence, but should not affect the properties of the steady-state itself in terms of values of key variables (for example, effective capital-labor ratio). In this note I present a model in which the invariance of the steady-state to transitory phenomena does not hold, which is in sharp con- trast to the standard models of growth. Temporary phenomena such as rationing may have a permanent effect on the choice of technique or the effective capital- labor ratio, even though the underlying parameters of the model are unchanged. Put another way, two economies with the same basic characteristics may have different steady-states depending on their past histories. 2. Production decisions with learning-by-doing Most models of technical progress assume that it is the entire production function or set of techniques which shifts over time. Learning-by-doing, on the other hand, * Financial support from the Foerder Institute for Economic Research, Tel-Aviv University and the Graduate School of Business, University of Chicago, is gratefully acknowledged. I wish to thank Yoram Mayshar, Eytan Sheshinski and Yoram Weiss for helpful comments. 25