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The macroeconomics of TANSTAAFL

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

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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File URL: https://econstor.eu/bitstream/10419/52727/1/67591986X.pdf
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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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Web page: http://www.wifa.uni-leipzig.de/en/dekanat.html

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  2. Timo Trimborn & Karl-Josef Koch & Thomas Steger, 2006. "Multi-Dimensional Transitional Dynamics: A Simple Numberical Procedure," CESifo Working Paper Series 1745, CESifo Group Munich.
  3. 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.
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  7. Charles I. Jones, 2004. "Growth and Ideas," NBER Working Papers 10767, National Bureau of Economic Research, Inc.
  8. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1986. "Assessing Dynamic Efficiency: Theory and Evidence," NBER Working Papers 2097, National Bureau of Economic Research, Inc.
  9. 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.
  10. Jones, Charles I & Williams, John C, 2000. "Too Much of a Good Thing? The Economics of Investment in R&D," Journal of Economic Growth, Springer, vol. 5(1), pages 65-85, March.
  11. Philippe Weil, 2008. "Overlapping Generations: The First Jubilee," Journal of Economic Perspectives, American Economic Association, vol. 22(4), pages 115-34, Fall.
  12. Grossmann, Volker & Steger, Thomas & Trimborn, Timo, 2013. "Dynamically optimal R&D subsidization," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 516-534.
  13. Christopher Laincz & Pietro Peretto, 2006. "Scale effects in endogenous growth theory: an error of aggregation not specification," Journal of Economic Growth, Springer, vol. 11(3), pages 263-288, September.
  14. Paul M. Romer, 2001. "Should the Government Subsidize Supply or Demand in the Market for Scientists and Engineers?," NBER Chapters, in: Innovation Policy and the Economy, Volume 1, pages 221-252 National Bureau of Economic Research, Inc.
  15. Ngo Van Long & Vincent Martinet, 2012. "Combining Rights and Welfarism: A New Approach to Intertemporal Evaluation of Social Alternatives," CESifo Working Paper Series 3746, CESifo Group Munich.
  16. Grossmann, Volker & Steger, Thomas M. & Trimborn, Timo, 2010. "Quantifying Optimal Growth Policy," Hannover Economic Papers (HEP) dp-440, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  17. 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.
  18. 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.
  19. Martinet, Vincent, 2011. "A characterization of sustainability with indicators," Journal of Environmental Economics and Management, Elsevier, vol. 61(2), pages 183-197, March.
  20. 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.
  21. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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  23. Luis A. Rivera-Batiz & Paul M. Romer, 1991. "Economic Integration and Endogenous Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 531-555.
  24. Jones, Charles I, 1995. "R&D-Based Models of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 759-84, August.
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