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The Macroeconomics of TANSTAAFL

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  • Volker Grossmann
  • Thomas M. Steger
  • Timo Trimborn

Abstract

Market imperfections may lead to underinvestment in dynamic general equilibrium models. An interesting but unexplored question is whether policy interventions which attenuate underinvestment gaps necessarily imply that consumption will initially decline. By employing a calibrated version of a standard R&D-based growth model, we show that raising the R&D subsidy rate may not only close the R&D underinvestment gap but also raise consumption per capita at all times ("intertemporal free lunch"). Hence, Milton Friedman’s conjecture 'There ain’t no such thing as a free lunch' (TANSTAAFL) may not apply. We also discuss the mechanics of an intertemporal free lunch and further examples.

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Bibliographic Info

Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c017_041.

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Length: 30 pages JEL Classification: E20, H20, O41
Date of creation: Sep 2012
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Handle: RePEc:deg:conpap:c017_041

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Keywords: Intertemporal free lunch; Endogenous growth; R&D underinvestment; Transitional dynamics;

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References

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  1. Charles I. Jones & John C. Williams, . "Too Much of a Good Thing? The Economics of Investment in R&D," Working Papers 95006, Stanford University, Department of Economics.
  2. Charles I. Jones, 2004. "Growth and Ideas," NBER Working Papers 10767, National Bureau of Economic Research, Inc.
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  5. Karl-Josef Koch & Timo Trimborn & Thomas M. Steger, 2005. "Multi-Dimensional Transitional Dynamics: A Simple Numerical Procedure," Volkswirtschaftliche Diskussionsbeiträge 121-05, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
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  7. Grossmann, Volker & Steger, Thomas M., 2013. "Optimal growth policy: The role of skill heterogeneity," Economics Letters, Elsevier, vol. 119(2), pages 162-164.
  8. Volker Grossmann & Thomas Steger & Timo Trimborn, 2010. "Quantifying Optimal Growth Policy," CESifo Working Paper Series 3092, CESifo Group Munich.
  9. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
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  13. Grossmann, Volker & Steger, Thomas M. & Trimborn, Timo, 2010. "Dynamically Optimal R\& D Subsidization," Hannover Economic Papers (HEP) dp-453, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  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.
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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. 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.
  3. Quaas, Georg, 2012. "Ein Nelson-Winter-Modell der deutschen Volkswirtschaft," Working Papers 112, University of Leipzig, Faculty of Economics and Management Science.
  4. Casajus, André, 2012. "The Shapley value without efficiency and additivity," Working Papers 114, University of Leipzig, Faculty of Economics and Management Science.
  5. 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.
  6. Schäfer, Andreas & Steger, Thomas, 2012. "Journey into the unknown? Economic consequences of factor market integration under increasing returns to scale," Working Papers 107, University of Leipzig, Faculty of Economics and Management Science.
  7. Casajus, André, 2012. "Solidarity and fair taxation in TU games," Working Papers 111, University of Leipzig, Faculty of Economics and Management Science.
  8. 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.
  9. 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.

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