This study formulates a dynamic mixed oligopoly model, in which a state-owned public firm competes against a private firm over multiple periods. We adopt a differential game formulated by Fershtman and Kamien [Econometrica 55 (1987), pp. 1151-1164] and investigate how the dynamic competition affects the optimal privatization policy. We characterize the open-loop Nash equilibrium (OLNE) and Markov-perfect Nash equilibrium (MPNE). We show that in the MPNE, an increase in the degree of privatization has a nonmonotonic effect on the price, increasing it in a wide range of parameter spaces, which is in sharp contrast to the result in the OLNE or static analyses. We also find that the optimal degree of privatization is higher in the MPNE than that in the OLNE and static equilibrium.These results suggest that intertemporal strategic behavior changes the optimal privatization policy.
By considering a simple endogenous growth model, we propose a new theoretical channel through which the presence of asset bubbles can promote economic growth. In the model economy, long-lived value-maximizing firms continuously improve the quality of their specific products through in-house research and development (R&D), while simultaneously new firms enter into the market. The key feature is endogenous market structure: The number of firms is endogenously determined, which leads to variation in firm size measured in terms of the scale of production at the level of an individual firm. The presence of asset bubbles unambiguously gives rise to larger firms. This allows in-house R&D expenditure to be spread over the greater numbers of goods that the firms produce, which can increase incentives to undertake in-house R&D.
This paper examines a dynamically optimal subsidy policy in a continuous‐time version of the endogenous growth model developed by Krusell (Krusell, P. (1998) “Investment‐Specific R&D and the Decline in the Relative Price of Capital”, Journal of Economic Growth, vol. 3, no. 2, pp. 131–141), in which investment‐specific technological progress occurs endogenously because of R&D performed by monopolistic firms. It is demonstrated that a combination of the time‐invariant subsidy for investment and the time‐variant subsidy for R&D enables the market equilibrium to replicate the socially optimal allocation.
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