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Wage formation investment behavior and growth regimes: an agent-based analysis

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Author Info

  • Mauro Napoletano

    (OFCE)

  • Giovanni Dosi

    (Laboratory of Economics and Management)

  • Giorgio Fagiolo

    (Laboratory of Economics and Management (LEM))

  • Andrea Roventini

    (Department of economics)

Abstract

Using the “Keynes+Schumpeter” (K+S) agent-based model developed we study how the interplay between firms’ investment behavior and income distribution shapes the short—and long-run dynamics of the economy at the aggregate level. We study the dynamics of investment under two different scenarios. One in which investment is fully determined by past profits, and one in which investment is tied to expectations about future consumption demand. We show that, independently from the investment scenario analyzed, the emergence of steady growth with low unemployment requires a balance in the income distribution between profits and wages. If this is not the case, the economy gets locked either in stagnation equilibria, or into growth trajectories displaying high volatility and unemployment rates. Moreover, in the demandled scenario we show the emergence of a non-linear relation between real wages and unemployment. Finally, we study whether increasing degrees of wage-flexibility are able to restore growth and unemployment and reduce the volatility in the economy. We show that this is indeed the case only when investment is profit-led. In contrast, in the scenario where investment is driven by demand expectations wage-flexibility has no effect on either growth and unemployment. In turn, this result casts doubts on the ability of wage-flexibility policies to stabilize the economy.

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Bibliographic Info

Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/f4rshpf3v1umfa09l8sci08kj.

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Date of creation: Oct 2012
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Publication status: Published in Revue de l'OFCE - Analyse et prévisions, 2012, pp.235-261
Handle: RePEc:spo:wpmain:info:hdl:2441/f4rshpf3v1umfa09l8sci08kj

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Keywords: agent bases models; growth regimes; income distribution; wage flexibility;

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References

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  1. Peter Howitt, 1986. "Wage Flexibility and Employment," Eastern Economic Journal, Eastern Economic Association, Eastern Economic Association, vol. 12(3), pages 237-242, Jul-Sep.
  2. S. Fabiani & M. Druant & I. Hernando & C. Kwapil & B. Landau & C. Loupias & Fernando Martins & T. Mathä & R. Sabbatini & H. Stahl & A. Stokman, 2005. "The Pricing Behaviour of Firms in the Euro Area: New Survey Evidence," Working Papers, Banco de Portugal, Economics and Research Department w200510, Banco de Portugal, Economics and Research Department.
  3. Dosi, Giovanni & Fagiolo, Giorgio & Napoletano, Mauro & Roventini, Andrea, 2013. "Income distribution, credit and fiscal policies in an agent-based Keynesian model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(8), pages 1598-1625.
  4. Gatti, Domenico Delli & Guilmi, Corrado Di & Gaffeo, Edoardo & Giulioni, Gianfranco & Gallegati, Mauro & Palestrini, Antonio, 2005. "A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 56(4), pages 489-512, April.
  5. Giovanni Dosi & Giorgio Fagiolo & Andrea Roventini, 2008. "Schumpeter Meeting Keynes: A Policy-Friendly Model of Endogenous Growth and Business Cycles," Working Papers, University of Verona, Department of Economics 50/2008, University of Verona, Department of Economics.
  6. Mario Amendola & Jean-Luc Gaffard & Francesco Saraceno, 2004. "Wage Flexibility and Unemployment: The Keynesian Perspective Revisited," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 51(5), pages 654-674, November.
  7. Feldstein, Martin S & Foot, David K, 1971. "The Other Half of Gross Investment: Replacement and Modernization Expenditures," The Review of Economics and Statistics, MIT Press, vol. 53(1), pages 49-58, February.
  8. Austan Goolsbee, 1998. "The Business Cycle, Financial Performance, and the Retirement of Capital Goods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 474-496, April.
  9. Alessandra Del Boca & Marzio Galeotti & Charles P. Himmelberg & Paola Rota, 2008. "Investment and Time to Plan and Build: A Comparison of Structures vs. Equipment in A Panel of Italian Firms," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(4), pages 864-889, 06.
  10. Greenwald, Bruce C & Stiglitz, Joseph E, 1993. "Financial Market Imperfections and Business Cycles," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(1), pages 77-114, February.
  11. Fabiani, Silvia & Druant, Martine & Hernando, Ignacio & Kwapil, Claudia & Landau, Bettina & Loupias, Claire & Martins, Fernando & Matha, Thomas & Sabbatini, Roberto & Stahl, Harald & Stokman, Ad, 2006. "What Firms' Surveys Tell Us about Price-Setting Behavior in the Euro Area," MPRA Paper 808, University Library of Munich, Germany.
  12. G. Fagiolo & G. Dosi & R. Gabriele, 2004. "Matching, Bargaining, And Wage Setting In An Evolutionary Model Of Labor Market And Output Dynamics," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., World Scientific Publishing Co. Pte. Ltd., vol. 7(02), pages 157-186.
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Cited by:
  1. Giovanni Dosi & Giorgio Fagiolo & Mauro Napoletano & Andrea Roventini, 2012. "Income Distribution, Credit and Fiscal Policies in an Agent-Based Keynesian Model," LEM Papers Series, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy 2012/03, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  2. Alessandro Caiani & Antoine Godin & Stefano Lucarelli, 2014. "Innovation and finance: a stock flow consistent analysis of great surges of development," Journal of Evolutionary Economics, Springer, Springer, vol. 24(2), pages 421-448, April.
  3. Ricetti, Luca & Russo, Alberto & Gallegati, Mauro, 2013. "Unemployment benefits and financial leverage in an agent based macroeconomic model," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, Kiel Institute for the World Economy, vol. 7(42), pages 1-44.

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