Grossmann, Volker Steger, Thomas M. Trimborn, Timo
Year of Publication:
Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät, Universität Hannover 482
This paper shows that dynamic inefficiency can occur in dynamic general equilibrium models with fully optimizing, infinitely-lived households even in a situation with underinvestment. We identify necessary conditions for such a pos- sibility and illustrate it in a standard R\&D-based growth model. Calibrating the model to the US, we show that a moderate increase in the R\&D subsidy indeed leads to an intertemporal free lunch (i.e., an increase in per capita consumption at all times). Hence, Milton Friedmans conjecture There aint no such thing as a free lunch (TANSTAAFL) may not apply.