Dynamic R&D competition with memory

We consider a differential game of R&D competition and explore the impact of rivalry on the firms' investment behavior over time. Using closed-loop strategies and hence allowing for strategic interactions among rival firms we show that R&D spending by the individual competitor is increased due to competition in the race for priority. This leads us to argue that competitive encounters enhance R&D activities at the same time as increasing efficiency in the race for a technological breakthrough.     

The Effect of Aggregation Bias: An NTB‐modelling Analysis of Turkey's Agro‐food Trade with the EU

We explore how different data aggregation levels affect the gravity estimates of non‐tariff barriers (NTBs) in the agro‐food sector, and we examine their related impacts on policy simulations of an expansion to the European Union (EU) that would include Turkey. We calculate two sets of ad valorem equivalents (AVEs) of NTBs using the gravity approach to disaggregated and aggregated Central Product Classification data for 15 Global Trade Analysis Project (GTAP) agro‐food sectors. We find that the AVEs of NTBs vary substantially across products and that using aggregated data primarily results in greater effects of NTBs. In a second step, we incorporate the AVEs of NTBs into the GTAP model to evaluate Turkey's EU membership and conclude that aggregation bias has considerable effects on both the estimation of NTBs and the general equilibrium simulation results. Utilising different data aggregation levels leads to a great variability of trade costs of NTBs and, hence, to misleading trade and welfare effects.     

Financialisation and the slowdown of accumulation

Over the past decades, the financial investment of non-financialbusinesses has been rising, and the accumulation of capitalgoods has been declining. The first part of the paper offersa novel theory to explain this phenomenon. Financialisation,the shareholder revolution and the development of a market forcorporate control have shifted power to shareholders and thuschanged management priorities, leading to a reduction in thedesired growth rate. In the second part, the link between accumulationand financialisation is tested econometrically by means of atime series analysis of aggregate business investment for theUSA, the UK, France and Germany. Extensive tests of robustnessare performed. For the first three countries, evidence supportingthe negative effect of financialisation on accumulation is found.     

Cyclical dynamics in a Kaleckian model with demand and distribution regimes and endogenous natural output

We analyse the interaction of demand and income distribution in a dynamic Kaleckian model with endogenous natural output. Endogenous changes of the natural output level to changes in the demand-determined actual output level have featured prominently in discussions of hysteresis after the crisis of 2008. We consider wage-led and profit-led demand (PLD) regimes and goods market-led and labour market-led income distribution regimes. The stability of the steady state is related to the endogeneity of natural output level in certain regimes. Limit cycles arise when the strong flexibility of prices or wages to the output gap is combined with moderate natural output hysteresis. A Kaleckian model with a wage-led demand regime and anticyclical profit share is less unstable and pseudo-Goodwin cycles can arise in the PLD regime with a procyclical profit share.     

Commitment and coordination in a dynamic game model of international economic policy-making

In this paper, we consider a dynamic game model of two identical countries. Policy-makers of both countries have quadratic intertemporal objective functions and want to stabilize domestic output, domestic inflation, and the real rate of exchange. We present different analytical and numerical solutions for this policy game. Noncooperative open-loop equilibria are interpreted as requiring unilateral commitment and policy-makers' credibility. Potential gains from cooperation are present, as the noncooperative equilibrium solutions are not Pareto-optimal. Under an information pattern that admits memory strategies, the possibility of obtaining cooperative results without coordination and commitment arises.     

On the optimality of limit cycles in dynamic economic systems

The purpose of this paper is to derive conditions for the optimality of a limit cycle in a dynamic economic system and to interpret them economically. A fairly general two-state continuous-time nonlinear optimal control problem is considered. It turns out that for this class of models three different economic mechanisms can be identified as the possible source of limit cycles. One relates to an intertemporal substitution effect expressed in terms of complementarity over time, the second one is a dominating cross effect between the state variables of the system (i.e., the capital stocks in our model), and the third one is positive growth at the equilibrium.We acknowledge the helpful comments by William A. Brock, Gerhard Sorger, Franz Wirl, and two anonymous referees. The research was partly supported by the Austrian Science Foundation under contract No. P6601.