Zeitschrift für Nationalökonomie

We incorporate the external effects of capital in production and endogenous technology choice into the standard overlapping generations model. We demonstrate that our model can exhibit a poverty trap, a middle-income trap, and perpetual growth paths. We also show that, under some economic conditions, an economy exhibits all three of these phenomena, depending on its initial capital level, and that the economy caught in the middle-income trap can exhibit chaotic fluctuations in the long run. This is a stark contrast to the result obtained by Umezuki and Yokoo (J Econ Dyn Control 100:164-175, 2019a) that we cannot observe any chaotic fluctuations. Because the model of Umezuki and Yokoo (2019) is a special case of our model in the sense that there is no externality in production, our result means that we need the combination of technology choice and externalities in production to obtain chaotic fluctuations in the standard overlapping generations model with Cobb-Douglas technologies.

This paper provides a new theoretical justification for entry to raise incumbent’s profit. In an industry with product differentiation and when firms use different strategic variables, we show that entry by an additional price setter may end up benefitting another price setting incumbent. This is due to the response of existing quantity setters, who contract their output after entry. Such reduction in output, which creates demand for the price setters, may more than compensate the reduction in price that is brought about by entry, provided that the products are not sufficiently differentiated.