Essays on Dynamic Games, Sustainable Endogenous Growth and Regime Shifts

Abstract

[eng] This PhD thesis examines the complex interplay between dynamic games, environmental economics, behavioral economics, and economic growth, with a particular emphasis on natural resource issues. Drawing from the fields of optimal control theory and differential games, the research presented in this thesis aims to contribute to the debate on the consequences of various aspects, including temporal inconsistencies, status concerns preferences when agents compare their relative performance, endogenous regime switch problems, natural resource extraction, and economic growth. The thesis is divided into five chapters, with the first serving as an introduction and the last providing conclusions. The second chapter investigates the influence of time-inconsistencies in the context of endogenous regime change, i.e., when agents prone to procrastination must decide on the appropriate time to adopt a different regime with different characteristics. The importance of studying such a transition lies in weighing the adverse short-term consequences against the improvements experienced in the long-term. The problem is addressed by investigating a non-standard, two-stage optimal control problem. The study offers a comprehensive understanding of how various discount functions affect the optimal timing of transitions between successive regimes. This analysis highlights the importance of understanding the implications of time-inconsistent preferences in decision-making processes. The problem is then applied in the context of adopting a more efficient technology for extracting non-renewable resources, which entails long term improvements but comes at a high cost in the short term. However, the theoretical derivations are general, making them suitable for application in any field where regime change is to be studied. Applications range from environmental economics, with decisions on adopting greener technologies that increase the efficiency of countries or companies and reduce their emissions, to international economics, where countries may decide to join free trade agreements or climate change treaties. Additionally, macroeconomic applications could be explored, such as the adoption of a new currency and the subsequent abandonment of a nation's monetary policy (e.g., European countries adopting the Euro). Direct applications in health economics could involve decisions regarding smoking cessation or initiating a fitness regimen. Even transportation economics might benefit from these results, when agents decide to switch to a more efficient but costlier electric vehicle. Consequently, the chapter underscores the need for policymakers and economists to consider these behavioral nuances when designing more effective and adaptable strategies in any field where regime change occurs. The third chapter examines the influence of status concerns preferences and relative performance comparisons on strategic decision-making in the context of renewable resource extraction and international trade. Using a differential games framework, this chapter probes the strategic ramifications of remaining in autarky or joining a free trade agreement. The analysis begins with the symmetric case, followed by an examination of the heterogeneous agent case. The introduction of status concerns in this analysis generalizes previously obtained results in the literature, shedding light on the consequences of such behavior. When agents compare themselves to others, they may be better off in autarky or trading with each other, contingent upon their preferences for comparing themselves to other players. Furthermore, this research emphasizes the potential impact of such behavior on strategic interactions between different players (such as countries) within the global economic landscape, stressing the importance of understanding these factors. The fourth chapter studies the ramifications of time-inconsistent preferences on economic growth, natural resource extraction, and the emission of pollutants into the atmosphere, with the latter emerging as a byproduct of economic activity and natural resource extraction. This analysis is conducted within the framework of an endogenous growth model. This research examines the behavior of time-inconsistent agents, known as “naive” agents, who display a propensity for procrastination, under various discount functions, and compares them with the behaviors of time-consistent agents. The investigation encompasses the effects on natural resource extraction, the generation of novel ideas, pollutant emissions, economic growth, and the discounted sum of utilities. The study reveals that the presence of time-inconsistent preferences can lead to unexpected outcomes, where procrastinating agents may enjoy higher levels of discounted utility and higher growth rates under the "strong observational equivalence principle." By modeling temporal preferences in a general setting, this work tries to contribute to the behavioral macroeconomics debate and shed light on its social implications. Consequently, this situation highlights the need to take “human behavior” into account when designing macroeconomic policies, especially those related to environmental impact and the evolution of social welfare.