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Underinvestment in public goods: The influence of state depended investment costs

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  • Nikos Ebel
  • Benteng Zou

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    (CREA, University of Luxembourg)

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    Abstract

    In this paper we determine and analyze open loop and Markovian perfect equilibrium of a standard capital accumulation differential games, which is extended by a state depended cost function. As an application of the model we do consider knowledge accumulation or lobbying of firms with connected objectives. By using Pontryagin maximum principle and Hamilton-Jacob-Bellman equation, we find that the feedback strategies could be worse than open loop strategy, which is neither only due to ‘linearity’ as inWirl (1996, European Journal of Political Economy) nor only due to ’feedback information’ as Fershtman and Nitzan (1991, European Economic Review). Rather it is a mixed effect of these two.

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    File URL: http://wwwen.uni.lu/content/download/23995/291649/file/2009-07_Underinvestment%20in%20public%20goods_The%20influence%20of%20state%20dependend%20investment%20costs.pdf
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    Bibliographic Info

    Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 09-07.

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    Date of creation: 2009
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    Handle: RePEc:luc:wpaper:09-07

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    1. Fudenberg, Drew & Tirole, Jean, 1983. "Capital as a commitment: Strategic investment to deter mobility," Journal of Economic Theory, Elsevier, Elsevier, vol. 31(2), pages 227-250, December.
    2. Fershtman, C. & Nitzan, S., 1988. "Dynamic Voluntary Provision Of Public Goods," Papers, Tel Aviv 21-88, Tel Aviv.
    3. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521637329.
    4. Wirl, Franz, 1996. "Dynamic voluntary provision of public goods: Extension to nonlinear strategies," European Journal of Political Economy, Elsevier, vol. 12(3), pages 555-560, November.
    5. Dockner, Engelbert J. & Van Long, Ngo & Sorger, Gerhard, 1996. "Analysis of Nash equilibria in a class of capital accumulation games," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 20(6-7), pages 1209-1235.
    6. Dockner Engelbert J. & Van Long Ngo, 1993. "International Pollution Control: Cooperative versus Noncooperative Strategies," Journal of Environmental Economics and Management, Elsevier, vol. 25(1), pages 13-29, July.
    7. A. Michael Spence, 1979. "Investment Strategy and Growth in a New Market," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 10(1), pages 1-19, Spring.
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