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Economic progress and skill obsolescence with network effects

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  • Peter Kennedy

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  • Ian King

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Abstract

We construct an OLG model with network effects to examine skill obsolescence when individuals can choose technological vintages. In the absence of transfer payments, some regions of the parameter space have unique stationary equilibria, others have unique cyclical equilibria, and others have multiple stationary equilibria. All equilibria are Pareto efficient. However, “rat race” equilibria can exist in which all agents currently alive prefer a slower rate of progress than occurs in equilibrium. When contemporaneous transfers are allowed, equilibria are unique everywhere, but a cycle still exists, and a rat race can still arise in equilibrium. Allowing intertemporal transfers (debt) ensures that all equilibria are stationary. In the relevant parameter range, the introduction of debt can eliminate cycles and increase the long-run growth rate. No rat race equilibria exist when debt is allowed. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Peter Kennedy & Ian King, 2005. "Economic progress and skill obsolescence with network effects," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(1), pages 177-201, July.
  • Handle: RePEc:spr:joecth:v:26:y:2005:i:1:p:177-201 DOI: 10.1007/s00199-004-0531-3
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    References listed on IDEAS

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    Keywords

    Skill vintages; Technological change; Network effects.;

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