We propose an evolutionary competition model to investigate the green transition of firms, highlighting the role of adjustment costs, state-dependent transition risk, and positive externalities in green technology adoption. Firms base their decisions to adopt either green or brown technologies on relative performance. To incorporate the costs of switching to another technology into their decision-making process, we adopt a novel, ad hoc crafted, replicator dynamics. Our global analysis reveals that increasing transition risk, e.g., by threatening to impose stricter environmental regulations, effectively incentivizes the green transition. Economic policy recommendations derived from our model further suggest maintaining high transition risk regardless of the industry’s level of greenness. Subsidizing the costs of adopting green technologies can reduce the risk of a failed green transition. While positive externalities in green technology adoption can amplify the effects of green policies, they do not completely eliminate the possibility of a failed green transition. Finally, evolutionary pressure reduces the extent of green economic policies required to ensure a successful green transition.

Environmental issues have an international dimension, with causes and consequences that extend beyond national borders—including the effects of the policies designed to address them. This paper investigates how different levels of environmental regulation influence the long-term spatial distribution of firms and households. The results suggest that only highly asymmetric regulations align with the Pollution Haven Hypothesis, causing firms to cluster in areas with lax environmental standards. In contrast, moderate differences in regulation tend to improve environmental quality across regions and can generate positive spillovers for countries adopting greener policies, such as attracting new residents and stimulating investment. While this lends support to the Porter Hypothesis, it does so through a less conventional mechanism. Rather than fostering innovation, stringent regulations enhances regional attractiveness by expanding the market size.

In this paper, we provide a detailed analytical treatment of the behavioral macroeconomic model by De Grauwe and Ji (2020 Structural reforms, animal spirits, and monetary policies. European Economic Review 124, 103395). Although the model’s dynamics is governed by a high-dimensional nonlinear law of motion, we are able to derive necessary and sufficient conditions for the local asymptotic stability of its fundamental steady state. Specifically, we find that under the authors’ baseline parameter setting, the fundamental steady state is locally asymptotically stable, implying that the dynamics of booms and busts only arise when exogenous shocks hit the system. However, we also identify conditions under which boom-bust dynamics emerge temporarily endogenously from within the model. By doing so, we may contribute to a deeper understanding of how booms and busts can arise in such a framework – insights that central banks can use to design more effective monetary policies.

Risk was incorporated into monetary aggregation over thirty-five years ago, using a stochastic version of the workhorse money-in-the-utility-function model. Nevertheless, the mathematical foundations of this stochastic model remain shaky. To firm the foundations, this paper employs richer probability concepts than Borel-measurability, enabling me to prove the existence of a well-behaved solution and to derive stochastic Euler equations. This measurability approach is less common in economics, possibly because the derivation of stochastic Euler equations is new. Importantly, the problem’s economics are not restricted by the approach. The results provide firm footing for the growing monetary aggregation under risk literature, which integrates monetary and finance theory. As crypto-currencies and stable coins garner attention, solidifying the foundations of risky money becomes more critical. The method also supports deriving stochastic Euler equations for any dynamic economics problem that features contemporaneous uncertainty about prices, including asset pricing models like capital asset pricing models and stochastic consumer choice models.

We propose a stock market model with chartists, fundamentalists and market makers. Chartists chase stock price trends, fundamentalists bet on mean reversion, and market makers adjust stock prices to reflect current excess demand. Fundamentalists’ perception of the stock market’s fundamental value is subject to animal spirits. As long as the stock market is relatively stable, fundamentalists neutrally believe in a normal fundamental value. However, fundamentalists optimistically (pessimistically) believe in a high (low) fundamental value when the stock market rises (falls) sharply. Our framework may produce boom-bust stock market dynamics that coevolve with waves of optimism and pessimism for parameter settings that would ensure globally stable stock market dynamics in the absence of animal spirits. Responsible for such a surprising outcome is the destabilizing nature of temporarily attracting virtual fixed points, brought about by animal spirits.

This paper proposes a theoretical insurance model to explain well-documented loss underreporting and to study how strategic underreporting affects insurance demand. We consider a utility-maximizing insured who purchases a deductible insurance contract and follows a barrier strategy to decide whether she should report a loss. The insurer adopts a bonus-malus system with two rate classes, and the insured will move to or stay in the more expensive class if she reports a loss. First, we fix the insurance contract (deductibles) and obtain the equilibrium reporting strategy in semi-closed form. A key result is that the equilibrium barriers in both rate classes are strictly greater than the corresponding deductibles, provided that the insured economically prefers the less expensive rate class, thereby offering a theoretical explanation to underreporting. Second, we study an optimal deductible insurance problem in which the insured strategically underreports losses to maximize her utility. We find that the equilibrium deductibles are strictly positive, suggesting that full insurance, often assumed in related literature, is not optimal. Moreover, in equilibrium, the insured underreports a positive amount of her loss. Finally, we examine how underreporting affects the insurer’s expected profit.

We present a multiregional endogenous growth model in which forward-looking agents choose their regions to live in, in addition to consumption and capital accumulation paths. The spatial distribution of economic activity is determined by the interplay between production spillover effects and urban congestion effects. We characterize the global stability of the spatial equilibrium states in terms of economic primitives such as agents’ time preference and intra- and interregional spillovers. We also study how macroeconomic variables at the stable equilibrium state behave according to the structure of the spillover network.

This article analyzes a general equilibrium growth model with overlapping generations and (production-induced) environmental degradation. Individuals react to environmental damages through mitigation or adaptation. In the former case, they reduce production and its environmental impact. In the latter, they do not tackle the causes of the problem but rather its consequences (i.e., the wellbeing loss due to environmental degradation) by increasing defensive expenditures. Despite its simplicity, the model can generate different long-term outcomes: convergence to a stationary state following a unique trajectory or local/global indeterminacy. In the last scenario, initial conditions (history) and individual expectations matter and the model can generate coordination failures and endogenous fluctuations. Results cast doubt on solutions to environmental problems relying on the role of individual behavior change or adaptation.

This paper reexamines the Serendipity Theorem of Samuelson (1975) from the stability viewpoint, and shows that, for the Cobb–Douglas preference and CES technology, the most-golden golden-rule lifetime state being stable depends on parameter values. In some situations, the Serendipity Theorem fails to hold despite the fact that steady-state welfare is maximized at the population growth rate, since the steady state is unstable. Through numerical simulations, a more general case of CES preference and CES technology is also examined, and we discuss the realistic relevance of our results. We present the policy implication of our result, that is, in some cases, the steady state with the highest utility is unstable, and thus a policy that aims to achieve the social optima by manipulating the population growth rate may lead to worse outcomes.

We consider an OLG model with production and altruistic agents initially developed by Barro (1974). Through a simple example, we show that, contrary to the intuition of Abel (1987) and Weil (1987), an increase in the degree of altruism can result in a decrease in the stationary level of bequests even if the Diamond model has a unique and stable steady state. To rule out this counterintuitive case, an assumption on the curvature of the production function is necessary.