Why Countries with the Same Technology and Preferences Can Have Different Growth Rates

Abstract

A standard Ak-model of endogenous growth has been extended to allow for an intertemporal conflict between capitalists and workers. For the dynamic game thus obtained, an equilibrium solution in feedback Nash (Markovian) strategies have been computed. However, many equilibria in trigger strategies can dominate the former. There are dominating strategies that depend on the country-specific bargaining power of the workers versus capitalists; they are both Pareto optimal and subgame perfect. This provides an explanation why countries, which are completely identical in preferences, technology and factor endowments, can experience different long-term growth rates.

Keywords: Growth rates, Technology, Intertemporal conflict, Nash strategies, Pareto optimality

JEL Classification: C72, C73, C8, D9, O41