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A stochastic differential game of capitalism

  • Leong, Chee Kian
  • Huang, Weihong

We develop a stochastic differential game of capitalism to analyze the role of uncertainty. In the deterministic game, the firm's rent is completely taxed away and the firm stops investing completely. In the stochastic game, the government does not tax the firm's rent completely. The firm posts a positive rate of investment if the firm's rent exceeds the labor's income. Although the cooperative solution is indeterminate, cooperation is always Pareto optimal compared to the non-cooperative Markovian Nash equilibrium. For individual rationality, we apply a payoff distribution procedure based on Yeung and Petrosyan (2006) to derive a subgame-consistent solution.

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Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 46 (2010)
Issue (Month): 4 (July)
Pages: 552-561

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Handle: RePEc:eee:mateco:v:46:y:2010:i:4:p:552-561
Contact details of provider: Web page: http://www.elsevier.com/locate/jmateco

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  1. Merton, Robert C, 1975. "An Asymptotic Theory of Growth under Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 42(3), pages 375-93, July.
  2. Chang, Fwu-Ranq & Malliaris, A G, 1987. "Asymptotic Growth under Uncertainty: Existence and Uniqueness," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 169-74, January.
  3. repec:cup:cbooks:9780521834063 is not listed on IDEAS
  4. Kaitala, Veijo & Pohjola, Matti, 1990. "Economic Development and Agreeable Redistribution in Capitalism: Efficient Game Equilibria in a Two-Class Neoclassical Growth Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 421-38, May.
  5. Lancaster, Kelvin, 1973. "The Dynamic Inefficiency of Capitalism," Journal of Political Economy, University of Chicago Press, vol. 81(5), pages 1092-1109, Sept.-Oct.
  6. Shimomura, Koji, 1991. "The feedback equilibria of a differential game of capitalism," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 317-338, April.
  7. repec:cup:cbooks:9780521637329 is not listed on IDEAS
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