This paper introduces endogenous and directed technical change in a growth model with environ- mental constraints. A unique Önal good is produced by combining inputs from two sectors. One of these sectors uses ìdirtyîmachines and thus creates environmental degradation. Research can be directed to improving the technology of machines in either sector. We characterize dynamic tax policies that achieve sustainable growth or maximize intertemporal welfare. We show that: (i) in the case where the inputs are sufficiently substitutable, sustainable long-run growth can be achieved with temporary taxation of dirty innovation and production; (ii) optimal policy involves both "carbon taxes" and re- search subsidies, so that excessive use of carbon taxes is avoided; (iii) delay in intervention is costly: the sooner and the stronger is the policy response, the shorter is the slow growth transition phase; (iv) the use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire when the two inputs are substitutes. Under reasonable parameter values and with sufficient substitutability between inputs, it is optimal to redirect technical change towards clean technologies immediately and optimal environmental regulation need not reduce long-run growth.
A remarkable result, due to Moore and Repullo (1988) is that any social choice function can be implemented as the unique equilibrium of a suitably constructed dynamic game (subgame perfect implementation). A recent literature has questioned whether common knowledge is a critical assumption for various implementation results (eg. Chung and Ely 2003 vis Nash implentation in undominated strategies). Directly related to subgame perfect implementation, Aghion et al. (2009) show that all extensive form mechanisms admit undesirable equilibria under an arbitrarily small p-belief perturbation from common knowledge, and that the desirable equilibrium in Moore-Repullo mechanisms fails to exist under such a perturbation. This paper test these findings in a laboratory experiment and finds that Moore-Repullo mechanisms exhibit this fragility in practice.
We consider the robustness of extensive form mechanisms when common knowledge of the state of Nature is relaxed to common p-beliefs about it. We show that with even an arbitrarily small amount of such uncertainty, the Moore-Repullo mechanism does not yield (even approximately) truthful revelation and in addition there are sequential equilibria with undesirable outcomes. More generally, we show that any extensive form mechanism is fragile in the sense that if a non-monotonic social objective can be implemented with this mechanism, then there are arbitrarily small common p-belief value perturbations under which an undesirable sequential equilibrium exists.
We develop a model that clari es the respective advantages and disadvantages of academic and private-sector research. Our model assumes full protection of intellectual property rights at all stages of the development process, and hence does not rely on lack of appropriability or spillovers to generate a rationale for academic research. Instead, we focus on control-rights considerations, and argue that the fundamental tradeoff between academia and the private sector is one of creative control versus focus. By serving as a precommitment mechanism that allows scientists to freely pursue their own interests, academia can be indispensable for early-stage research. At the same time, the private sectors ability to direct scientists towards higher-payo¤ activities makes it more attractive for later-stage research.
In a cross-section of countries, state regulation of labor markets is strongly negatively correlated with the quality of labor relations. In this paper, we argue that these facts reflect different ways to regulate labor markets, either through the state or through the civil society, depending on the degree of cooperation in the economy. We rationalize these facts with a model of learning of the quality of labor relations. Distrustful labor relations lead to low unionization and high demand for direct state regulation of wages. In turn, state regulation crowds out the possibility for workers to experiment negotiation and learn about the potential cooperative nature of labor relations. This crowding out effect can give rise to multiple equilibria: a “good” equilibrium characterized by cooperative labor relations and high union density, leading to low state regulation; and a “bad” equilibrium, characterized by distrustful labor relations, low union density and strong state regulation of the minimum wage.
This paper evaluates whether the cyclical pattern of fiscal policy can affect growth. We first build a simple endogenous growth model where entrepreneurs can invest either in short-run projects or in long- term growth enhancing projects. Long-term projects involve a liquidity risk which credit constrained firms try to overcome by borrowing on the basis of their short-run profits. By increasing Örmsímarket size in recessions, a countercyclical fiscal policy will boost investment in productivity-enhancing long- term projects, and the more so in sectors that rely more on external Önancing or which display lower asset tangibility. Second, the paper tests this prediction using Rajan and Zingales (1998)'s diff-and-diff methodology on a panel data sample of manufacturing industries across 17 OECD countries over the period 1980-2005. The evidence confirms that the positive effects of a more countercyclical Öscal policy on value added growth, productivity growth, and R&D expenditure, are indeed larger in industries with heavier reliance on external Önance or lower asset tangibility.