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The macroeconomics of TANSTAAFL

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  • Grossmann, Volker
  • Steger, Thomas M.
  • Trimborn, Timo

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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Bibliographic Info

Paper provided by University of Leipzig, Faculty of Economics and Management Science in its series Working Papers with number 101.

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Date of creation: 2011
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Handle: RePEc:zbw:leiwps:101

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Postal: Marschnerstraße 31, 04109 Leipzig
Web page: http://www.wifa.uni-leipzig.de/en/dekanat.html
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Related research

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

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  1. Jones, Charles I., 2005. "Growth and Ideas," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 16, pages 1063-1111 Elsevier.
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  5. Volker Grossmann & Thomas Steger & Timo Trimborn, 2010. "Dynamically Optimal R&D Subsidization," CESifo Working Paper Series 3153, CESifo Group Munich.
  6. Aghion, Philippe & Howitt, Peter, 2005. "Growth with Quality-Improving Innovations: An Integrated Framework," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 2, pages 67-110 Elsevier.
  7. Vincent Martinet & Ngo Van Long, 2012. "Combining Rights and Welfarism: a new approach to intertemporal evaluation of social alternatives," EconomiX Working Papers 2012-14, University of Paris West - Nanterre la Défense, EconomiX.
  8. Philippe Weil, 2008. "Overlapping Generations: the First Jubilee," Sciences Po publications info:hdl:2441/8712, Sciences Po.
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  10. Abel, Andrew B, et al, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," Review of Economic Studies, Wiley Blackwell, vol. 56(1), pages 1-19, January.
  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. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  13. Grossmann, Volker & Steger, Thomas M. & Trimborn, Timo, 2010. "Quantifying Optimal Growth Policy," IZA Discussion Papers 5007, Institute for the Study of Labor (IZA).
  14. Grossmann, Volker & Steger, Thomas M., 2012. "Optimal growth policy: The role of skill heterogeneity," Working Papers 117, University of Leipzig, Faculty of Economics and Management Science.
  15. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  16. 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.
  17. Philippe Weil, 2008. "Overlapping generations: the first jubilee," ULB Institutional Repository 2013/13430, ULB -- Universite Libre de Bruxelles.
  18. 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.
  19. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May.
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  21. Cass, David, 1972. "On capital overaccumulation in the aggregative, neoclassical model of economic growth: A complete characterization," Journal of Economic Theory, Elsevier, vol. 4(2), pages 200-223, April.
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Citations

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Cited by:
  1. 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.
  2. Andreas Schäfer & Thomas Steger, 2011. "Journey into the Unknown? Economic Consequences of Factor Market Integration under Increasing Returns to Scale," CESifo Working Paper Series 3676, CESifo Group Munich.
  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 & Hüttner, Frank, 2012. "Null players, solidarity, and the egalitarian Shapley values," Working Papers 113, University of Leipzig, Faculty of Economics and Management Science.
  5. 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.
  6. Casajus, André, 2012. "Solidarity and fair taxation in TU games," Working Papers 111, University of Leipzig, Faculty of Economics and Management Science.
  7. Casajus, André, 2012. "The Shapley value without efficiency and additivity," Working Papers 114, 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. 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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