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The Macroeconomics of TANSTAAFL

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  • Volker Grossmann
  • Thomas Steger
  • Timo Trimborn

Abstract

This paper shows that dynamic inefficiency can occur in dynamic general equilibrium models with fully optimizing, infinitely-lived households even in a situation with underinvestment. We identify necessary conditions for such a possibility and illustrate it in a standard R&D-based growth model. Calibrating the model to the US, we show that a moderate increase in the R&D subsidy indeed leads to an intertemporal free lunch (i.e., an increase in per capita consumption at all times). Hence, Milton Friedman’s conjecture There ain’t no such thing as a free lunch (TANSTAAFL) may not apply.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-11/cesifo1_wp3651.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3651.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3651

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Keywords: intertemporal free lunch; dynamic inefficiency; R&D-based growth; transitional dynamics;

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References

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  1. Norrbin, S.C., 1993. "The Relation Between Price and Marginal Cost in U.S. Industry: A Contradiction," Working Papers, Department of Economics, Florida State University 1993_05_04, Department of Economics, Florida State University.
  2. Charles I. Jones & John C. Williams, 1999. "Too Much of a Good Thing? The Economics of Investment in R&D," NBER Working Papers 7283, National Bureau of Economic Research, Inc.
  3. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  4. Grossmann, Volker & Steger, Thomas M. & Trimborn, Timo, 2010. "Quantifying Optimal Growth Policy," IZA Discussion Papers 5007, Institute for the Study of Labor (IZA).
  5. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  6. Luis A. Rivera-Batiz & Paul M. Romer, 1990. "Economic Integration and Endogenous Growth," NBER Working Papers 3528, National Bureau of Economic Research, Inc.
  7. Christopher Laincz & Pietro Peretto, 2006. "Scale effects in endogenous growth theory: an error of aggregation not specification," Journal of Economic Growth, Springer, Springer, vol. 11(3), pages 263-288, September.
  8. Grossmann, Volker & Steger, Thomas M., 2013. "Optimal growth policy: The role of skill heterogeneity," Economics Letters, Elsevier, Elsevier, vol. 119(2), pages 162-164.
  9. Grossmann, Volker & Steger, Thomas & Trimborn, Timo, 2013. "Dynamically optimal R&D subsidization," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(3), pages 516-534.
  10. Juin-jen Chang & Chun-chieh Huang & Hsiao-wen Hung, 2011. "Monopoly Power, Increasing Returns to Variety, and Local Indeterminacy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 384-388, April.
  11. Timo Trimborn & Karl-Josef Koch & Thomas M. Steger, 2004. "Multi-dimensional transitional dynamics : a simple numerical procedure," CER-ETH Economics working paper series 04/35, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  12. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(2), pages 407-37, May.
  13. Philippe Weil, 2008. "Overlapping Generations: the First Jubilee," Sciences Po publications info:hdl:2441/8712, Sciences Po.
  14. Ngo Van Long & Vincent Martinet, 2012. "Combining Rights and Welfarism: A New Approach to Intertemporal Evaluation of Social Alternatives," CESifo Working Paper Series 3746, CESifo Group Munich.
  15. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1986. "Assessing Dynamic Efficiency: Theory and Evidence," NBER Working Papers 2097, National Bureau of Economic Research, Inc.
  16. Martinet, Vincent, 2011. "A characterization of sustainability with indicators," Journal of Environmental Economics and Management, Elsevier, vol. 61(2), pages 183-197, March.
  17. Jones, Charles I., 2005. "Growth and Ideas," Handbook of Economic Growth, Elsevier, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 16, pages 1063-1111 Elsevier.
  18. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 3-42, July.
  19. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(4), pages 759-84, August.
  20. Aghion, Philippe & Howitt, Peter, 2005. "Growth with Quality-Improving Innovations: An Integrated Framework," Handbook of Economic Growth, Elsevier, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 2, pages 67-110 Elsevier.
  21. Cass, David, 1972. "On capital overaccumulation in the aggregative, neoclassical model of economic growth: A complete characterization," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(2), pages 200-223, April.
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Citations

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Cited by:
  1. Casajus, André & Huettner, Frank, 2013. "Null players, solidarity, and the egalitarian Shapley values," Journal of Mathematical Economics, Elsevier, vol. 49(1), pages 58-61.
  2. Steger, Thomas & Schäfer, Andreas, 2012. "Journey into the Unknown? Economic Consequences of Factor Market Integration under Increasing Returns to Scale," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62062, Verein für Socialpolitik / German Economic Association.
  3. Prettner, Klaus & Werner, Katharina, 2014. "Human capital, basic research, and applied research: Three dimensions of human knowledge and their differential growth effects," Center for European, Governance and Economic Development Research Discussion Papers 186, University of Goettingen, Department of Economics.
  4. Gawel, Erik, 2013. "Neuordnung der W-Besoldung: Ausgestaltung und verfassungsrechtliche Probleme der Komsumtionsregeln zur Anrechnung von Leistungsbezügen," Working Papers 115, University of Leipzig, Faculty of Economics and Management Science.
  5. Casajus, André, 2012. "Solidarity and fair taxation in TU games," Working Papers 111, University of Leipzig, Faculty of Economics and Management Science.
  6. Quaas, Georg, 2012. "Ein Nelson-Winter-Modell der deutschen Volkswirtschaft," Working Papers 112, University of Leipzig, Faculty of Economics and Management Science.
  7. Casajus, André & Hüttner, Frank, 2012. "Nullifying vs. dummifying players or nullified vs. dummified players: The difference between the equal division value and the equal surplus division value," Working Papers 110, University of Leipzig, Faculty of Economics and Management Science.
  8. Quaas, Georg & Köster, Robert, 2012. "Ein Modell für die Wirtschaftszweige der deutschen Volkswirtschaft: Das "MOGBOT" (Model of Germany's Branches of Trade)," Working Papers 106, University of Leipzig, Faculty of Economics and Management Science.
  9. Casajus, André, 2012. "The Shapley value without efficiency and additivity," Working Papers 114, University of Leipzig, Faculty of Economics and Management Science.

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