An Evolutionary Analysis of Growth and Fluctuations with Negative Externalities

Anindya S. Chakrabarti () and Ratul Lahkar ()
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Anindya S. Chakrabarti: Indian Institute of Management Ahmedabad

Dynamic Games and Applications, 2018, vol. 8, issue 4, No 5, 733-760

Abstract: Abstract We present an evolutionary game theoretic model of growth and fluctuations with negative externalities. Agents in a population choose the level of input. Total output is a function of aggregate input and a productivity parameter. The model, which is equivalent to a tragedy of the commons, constitutes an aggregative potential game with negative externalities. Aggregate input at the Nash equilibrium is inefficiently high causing aggregate payoff to be suboptimally low. Simulations with the logit dynamic reveal that while the aggregate input increases monotonically from an initial low level, aggregate payoff may decline from the corresponding high level. Hence, a positive technology shock causes a rapid initial increase in aggregate payoff, which is unsustainable as agents increase aggregate input to the inefficient equilibrium level. Aggregate payoff, therefore, declines subsequently. A sequence of exogenous shocks, therefore, generates a sustained pattern of growth and fluctuations in aggregate payoff.

Keywords: Business cycles; Potential games; Logit dynamic; Negative externality (search for similar items in EconPapers)
JEL-codes: C72 C73 D62 E32 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s13235-017-0234-6

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