Economic growth models with strategic saving decisions

The proposed project aims at contributing to the largely unexplored research area of economic growth models in which the saving decisions are made in a strategic way. Such models are highly interesting both from a theoretical/methodological point of view and because of their potential implications for development economics. There are two reasons why saving decisions may be made strategically: (i) Agents can form powerful groups (e.g., unions or ethnic communities) which can affect the allocation of resources, the fiscal process, and the aggregate saving behavior of the economy through lobbying, political influence, corruption, or forcible misappropriation. This is particularly relevant in developing economies with insecure property rights. (ii) A well-known result in intertemporal general equilibrium theory states that in a competitive, infinite-horizon economy with heterogeneous consumers (or dynasties, respectively), only the most patient consumers/dynasties will hold capital in the long run. Taking this result at face value, it follows that in the long run the capital market is more appropriately described by an oligopoly than by perfect competition (provided that there are only few most patient consumers). We propose studying four specific research topics related to economic growth models with strategic saving decisions. First, we want to explore models in which some but not all agents belong to powerful groups, whereas the rest behave competitively. Second, we want to develop economic growth models in which a few powerful groups bargain over the allocation of resources (instead of playing a non-cooperative Nash equilibrium). Third, we propose studying economic growth models in which households can hold household-specific types of capital, thereby turning the capital market into one of monopolistic competition. And, fourth, we want to analyze strategic equilibria of economic growth models under the assumption that the players choose feedback rules describing their saving behavior (rather than sequences of capital holdings).

The tradeoff between consumption and saving is at the heart of almost all intertemporal economic decision making. Typically, this tradeoff is studied in a competitive framework, that is, the decision makers (agents) are assumed to be so small that their influence on the economic environment (interest rates, prices, aggregate demand and supply, etc.) is negligible. In the present project, on the other hand, we have analyzed optimal consumption/saving decisions in situations where they do affect the economic environment and where everybody is aware of these effects. In such situations, saving decisions obtain a strategic component. The project has studied strategic saving decisions in different settings. In one of them, we looked at the joint extraction of a common resource stock by two agents. We assumed that the agents meet once every period in order to negotiate their extraction rates. The crucial feature on which we focused is that the agents do not or cannot make binding commitments that extend beyond the current period. Although this avoids the problem of dynamic inconsistency (i.e., agents never face any incentives to deviate from previously announced plans), it typically leads to a loss of efficiency (i.e., over extraction). These results are relevant for understanding the outcome of annual bargaining rounds over catch quota by counties sharing access to a common fish population in the sea, or for understanding non-binding agreements regarding greenhouse gas emissions reached during repeated negotiations between the world`s nations. In a second setting we have focused on the role of property rights. If these are insecure (as it is the case in a number of developing countries), powerful agents can appropriate the public capital stock and turn it into private but secure assets. Using a model that captures this situation, we have studied the role of appropriation cost, wealth effects, and heterogeneity of the agents. One particular striking result that we found is that an increase of the appropriation costs (for example the cost of money laundering) may actually reduce the growth rate of the public capital stock. Finally, a third setting in which we have studied strategic saving decisions occurs when market forces drive an otherwise perfectly competitive economy towards a situation where only a few households have positive wealth. In this situation, the competitive assumption becomes questionable and a model based on strategic interactions seems to be better suited. By using two different versions of such a model, we have been able to characterize the long-run wealth distribution that emerges out of the strategic saving decisions. Although these findings are mostly of theoretical interest, they may become relevant if and when wealth inequality continues to increase at the rates currently observed in many countries.