Special Interests and Technological change

Bellettini, Giorgio; Ottaviano, Gianmarco Working Paper Special Interests and Technological change Quaderni - Working Paper DSE, No. 340 Provided in Cooperation with: University of Bologna, Department of Economics Suggested Citation: Bellettini, Giorgio; Ottaviano, Gianmarco (1999) : Special Interests and Technological change, Quaderni - Working Paper DSE, No. 340, Alma Mater Studiorum - Università di Bologna, Dipartimento di Scienze Economiche (DSE), Bologna, https://doi.org/10.6092/unibo/amsacta/4969 This Version is available at: https://hdl.handle.net/10419/159181 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc/3.0/ SpecialInterestsand TechnologicalChange¤ GiorgioBellettiniyGianmarcoI.P. Ottavianoz July30,1999 Abstract WemodelanOLGeconomywhereproductivitygrowthcomesfromtwo alternativesources:process innovationand learning-by-doing.Thereisa trade-o¤betweenthetwoinsofarasfrequent technologicalupdatesreduce thescopeforlearning onexistingtechnologies.Acon‡ictis shownto arise betweentheyoung and theold,becausetheformerfavorinnovationwhile thelatterpreferlearning.Wemodeltheinteraction between di¤erentgenerationsand short-lived policymakersasadynamic commonagencyproblem, where competing generationsinvestacertainamountofresourcestolobby eitherforthemaintainance ofthe current technologyortheadoptionof anewone.Byfocusing ontruthfulMarkovperfectequilibria,we characterize thepoliticalequilibriumand showitsdependence ontheunderlying technologicalparameters. ¤WewouldliketothankPierpaoloBattigalli, DirkBergemann,GiovannaIannantuoni, Michel Lebreton,AndreaPrat,José-VictorRios-Rull and JacquesThisseforhelpfulcommentsand suggestions. yBellettini: DipartimentodiScienze Economiche,UniversitàdiBologna.Tel. +39-0512098661,fax: +39-051-2098040,e-mail: [email protected]. zOttaviano:DipartimentodiScienze Economiche,UniversitàdiBologna.Tel. +39-0512098666,fax: +39-051-2098040,e-mail: [email protected] 1.Introduction “the countrythatismoredevelopedindustriallyonlyshows,totheless developed,theimageofitsownfuture”(KarlMarx) AspointedoutbyLucas(1988)in hisbreath-takingmanifesto,onethegreatestchallengestoeconomicthinkingistounderstand theoriginsoflargeinternational incomedi¤erences,thereason beingthatsuchwidedi¤erences-of factor 30-40 betweenthetailsofthepercapitaincomelevelsdistribution-seemtosignalthe existence ofhugeunexploited possibilitiesforimprovinghumanwelfare. Adecadeafter,evenifourunderstandinghasmadeimportantstepsforward, the challengeis still there(Prescott,1998). Ontheoneside,neoclassicalgrowth theoryhasdrivenourattentiontointernationaldi¤erencesinthestocksofproductivefactors.However,simplegrowthaccountingexercises showthatdi¤erencesinsuchstockscouldexplain di¤erencesin percapitaincomelevelsonly ifinvestmentinintangibleassets(e.g.humanand organizationalcapital)were implausiblylarge-insomeinstances,aslargeasGDP. Ontheotherside,new growththeoryhas stressedtheroleofinternationaldi¤erencesinendogenously accumulatedstocksofusableknowledgeas signalled bydi¤erencesintotalfactorproductivities.However,thisperspective clasheswiththeobservedabsence ofclearnationalbiasesininternationalabsolutelaborproductivitiesacross sectors:afterall, ifworkersinone countrywerebettereducatedorhad betterwork practicesthanworkersinanothercountry,theformershould bemoreproductive thanthelatterinall sectors.Therefore,di¤erencesinthestocksof factorsand ofusableknowledgeprovideonlyapartialexplanationofinternational income discrepancies. Prescott (1998)arguesthat, inordertocompletethe explanation, itisnotusableknowledgeinitselfthathastobe considered butrathertheamountofusable knowledge thatisactuallyused.Totalfactorproductivitiesdi¤erbecause countriesdi¤erintermsoftheirabilityto adoptorfullyexploitnewerand neweravailabletechnologies,orwhatKindleberger(1962)calls“the capacitytotransform”. Becausenewtechnologyadoptioninduces structuralchangeswhoseacceptance requirestotradeo¤short termadjustmentsacri…cesagainstlongterme¢ciency gains,the capacitytotransformislargelydetermined bythe compositionof‘progressive’and ‘conservative’con‡ictinginterests(“the clash between progress and security”,Fisher,1935).Underthisperspective,thewealthofnationscomes 2 todepend onthe e¢cacyofinstitutional interestintermediation processesthat leadtonationaldecisionmaking.Thisvisionis stronglysupported byhistorical evidence (Olson,1982;Gilpin1987;Mokyr,1990).Aclassicalexampleofthe failureofinstitutional interestintermediationistheinertialexplanationofthe declineofGreatBritainastheworld hegemonic economicpowertowardsthe end ofthenineteenthcentury:“Britainwascaughtinasetofideologicaltraps.All thestrategiesavailabletoherwereblockedo¤inonewayoranother”(Lewis, 1978).Thevisionisalsobroadlyconsistentwithevidence comingfrominternationalsectorialanalyses(e.g., Clark,1987;Baily,1993;Wolcott,1994;Bailyand Gersbach,1995)and business-orientedcasestudieswhich pointouthowideologicaltrapsmayopposethedevelopmentof…rms‘competitiveadvantage’through technologicalupgrading(Porter,1990). Ouraimistoinvestigatehowideologicaltrapsblockingtheadoptionofnew technologiesmayarisefromunbalancedinterestrepresentationaswell as shortsighteddecisionmakingand,thus,tosuggestthatinternationaldi¤erencesintotal factorproductivitymaybelinkedtointernationaldiscrepanciesinthemechanics ofpolitical intermediation betweenconservativeand progressiveinterests. Tocaptureinasimplewaysuchaclash betweenconservativeand progressive interests,wemodelanOLGeconomywhereproductivitygrowthcomesfromtwo alternativesources:process innovationand learning-by-doing.Thereisatradeo¤betweenthetwoinsofarasfrequent technologicalupdatesreduce thescope forlearning onexistingtechnologies.Acon‡ictis shownto arisebetweenthe young and theold,becausetheformerfavorinnovationwhilethelatterprefer learning.Underthisrespect,the economicsofthepaperismuchinthespiritof Krusell and Rìos-Rull’s(1996)path-breakingcontribution basedonthevintage humancapitalmodelofChariand Hopenhayn(1991).However, inordertomake ourpointasclearaspossible,weusethestreamlinedversionofthatworkas presented byAghionand Howitt (1998).Theideais simple.Ateach pointin timethereisanincumbentvintageofanaggregatetechnology.Suchavintage caneitherbestill improvableorobsolete.Intheformercase, learning-by-doing canenhance itsproductivity, inthelatterthescopeforlearningisexhausted. Also ateach pointintimethereisanewvintage,whichisfreelyavailableand, ifadopted,becomesmoreproductivethantheoldoneonlyaftersomerunning in.Thisinitialproductivitygapisthemoreseveretheless learninghastaken place onthepreviousvintage.Therefore,thereisatrade-o¤betweeninnovation 3 and learning-by-doing,whichcreatesapotentialcon‡ictofinterestsbetweenthe youngandtheoldwho,duetotheirdi¤erentlifehorizons,tendtofavorinnovation and learningbydoingrespectively. Amoresigni…cantdeparturefromthe existingliteratureismadeinterms ofinterestintermediation.BothKrusell and Rìos-Rull (1996)and Aghionand Howitt (1998)assumethat theintergenerationalcon‡ictishandledbydemocratic votingsothat theinterestsofthelargergeneration prevail. Whileanenlightening…rststep,thisapproachisunsatisfactoryfortwomainreasons.First,when technologicalchangeisinvolved,publicintervention usuallytakestheformof governmentregulationinareas suchasproductand securitystandards,environmentalpolicy,restrictionsonentry,and tradebarriers,whicharetherealmof organizedinterestgroup actionratherthanofdemocraticvoting(Viscusi, Vernon and Harrington,1993).Second,byattributing anoverwhelmingroletodemographicfactors,democracysomehowobscurestheunderlyingeconomicstances.1 Forbothreasons,wemodelanalternativemechanismofinterestintermediation, basedontheactionoforganizedinterestgroups,thatwill beshowntoyielda resolutionoftheintergenerationalcon‡ictinwhicheconomicfactorsplayarelevantrole.Insodoing,webuildontheideasofOlson(1965)who arguesthat whatmattersforthesuccess ofspecial interestgroupsaretherelativesurpluses that theyareableto generatefortheirmembers,ratherthantheir relativedemographicsizes.Hisinsightshavebeenrecentlyformalizedintermsofacommon agencyset-up where, inthewakeofBernheimand Whinston(1986),competing interestgroups(principals)lobbyanincumbentpolicymaker(agent)inorderto in‡uence herdecisions(see,e.g., Grossmanand Helpman,1994;Dixit,Grossman and Helpman,1997;Grossmanand Helpman,1998).2Thepolicymakerknows the e¢cientdecisiontomakefortheliving generations,butsheisassumedto tradeo¤aggregatewelfareagainstspecial interests. Whileourworkisdeeplyrootedinthe commonagencyapproachtopolitics, wedepartfromits standardimplementation underonemajor respect thatbrings 1Fromanempiricalpointofview,thisfeaturemayalsoclashwiththeinsigni…cance of demographicvariablesoftenfound ingrowthregressions(Levineand Renelt,1992). 2See alsothe elegantfoundation byGrossmanand Helpman(1996)whointroduce lobbiesin ademocratic environmentwhere competingideologicallyoriented partiesuse campaigncontributionsfromalignedgroupsofvotersinordertowinseatsin parliament.Suchcontributions arespent toin‡uence thevotingbehaviorofuninformed(notaligned)citizens. 4 usbacktotheoriginalmenuauctionofBernheimand Whinston(1986).We liketothinkofour regulator(auctioneer)asbeinguninformedand with nopersonalpreferencesoveralternativepolicychoices.Moreover,herdecisionmaking is(possiblyslightly)costlysothatinertiaisthepolicyoutcomeintheabsence of anyexternalstimulus.Interestgroups(bidders)understand thepotentialroleof theiractivities(menusofo¤ers)infosteringtheimplementationoftheirfavorite policiesand arewillingtouseresourcestomakethemselvesheard.Thestrengths oftheircompetinge¤ortstransmit theirprivateinformationtothepolicymaker. Inoursimpleframework,thismeansthatcompeting generationsinvestacertain amountofresourcesinsupportingeitherthemaintenance ofthe currentvintage technologyortheadoptionofthenewone.In doingso,theyexpect thepolicy makertoimplement thealternative,whosesupportabsorbsthelargeramount ofresources.Therefore,ourcharacterizationofspecial interestpoliticsisessentiallydi¤erentfromtheonebasedonin‡uence/campaign drivencontributions (Tullock,1967; Krueger,1974;Bhagwati, 1982;Becker,1983;Snyder,1990)even initsrecentcommonagencyformulationand itisclosertotheidea ofinformational lobbying(Banksand Weingast,1992;Ainsworth,1993;Austen-Smithand Wright,1992 and 1994;Lohmann,1995),whichviewsinterestgroupsas sources ofinformationforimperfectlyinformed politicians. AsinGrossmanand Helpman(1998),politicalmyopiaisembeddedinthe modelbyassumingthatregulators stand ino¢ce foroneperiodonly.Thisleads tothe characterizationofthemechanicsofinterestintermediationineachmomentasamenu auctiongamebetweena one-period-livedauctioneerand two overlapping generationsofbidders.Wearenotawareofanystudyofsucha gameand evenrelatedresultsarescarce.Bergemann and Välimäki(1998a)analyze arepeatedcommonagencygamewithimperfectobservability.Theyalso investigateadynamic commonagencygamewithin…nitely-lived playersand proposetheTruthfulMarkovEquilibriumconcept thatwealso adopt (Bergemann and Välimäki, 1998b).Grossmanand Helpman(1998)characterize theMarkov PerfectEquilibriumofacommonagencygameinwhichthereareoverlapping generationsbutonlytheolderisexogenouslyassumedto actasanactiveprincipal. Moreover,whiletheirpolicyspace iscontinuous,ourtechnologyadoption choice isinherentlybinary.Thisdiscretefeaturewill beshownto giveriseto 5 endogenouslobbyformation.3 Byassumingforsimplicitythatauctioneersmaximize totalbidsand perfect informationonthesideofthebidders(Bernheimand Whinston,1986),weare abletoshowthat,…rst,thewinneroftheauctionistheinterestgroup thatis ableto generatethelarger relativesurplusforitsmembersindependentlyfromits size.Second,becauseofperfectinformation,the expectedloserdoesnotorganize anycollectiveaction.Third,thewinner’se¤ortabsorbsanamountofresources whichisequaltotherelativesurplusthat thelosing group wouldobtainwere it tochosethepolicy(second-price)sothat,providedthatexisting generations havefree access tothelobbyingprocess,theoutcomeise¢cientfromtheirpoint ofview.Thisresult,whichisacorollaryofwell-known propertiesofauctions(Rileyand Samuelson,1981;Bernheimand Whinston,1986;Wolfstetter,1996), is reminiscentofthe e¢ciencyargumentby Wittman(1989)whosustainsthatcompetinguninformed politicalentrepreneurshaveall theincentivestodiscoverand exploitunknown politicaldemands.Fourth,theidentityofthewinnerdepends cruciallyontheunderlyingeconomicparameters.Fifth,acyclewhichinvolves periodsofstagnation beingfollowed byperiodsoftechnologicalchangemayarise endogenouslyfromthe competing actionsoforganizedinterestgroups.Sixth, sucheconomic cycleisaccompanied byanendogenouspoliticalcycleoflobbies formation.Seventh,becausepolicymakersareshort-livedand living generations donot takeinto account theimpactoftheirchoicesonall futuregenerations, ingeneralthepoliticaloutcomeisdynamicallyine¢cientfromthepointofview of futuregenerations.Therefore,unbalancedinterestrepresentationand shortsighted decisionmakingleadtoine¢cient technologicaltrajectories. Theimplicationofouranalysisisthatinternational incomedi¤erencescould betracedbacktomoreorlesssevereproblemsofinterestrepresentationandpolicy makers’planninghorizons.Interestinglyenough,since,duetomore contained free riderproblemsand incumbentadvantages,more concentratedand betterestablishedinterestsarelikelytoface substantiallylowercostsofcollectiveaction thanmoredi¤useand recentones(Olson,1965;Bendorand Mookerjee,1987), ouranalysisalsosuggeststhatextended democraticmandatescan beinterpreted asa‘second-best’politicalsolutionthatsacri…ces someinformationabout the personal intensitiesofcitizens’preferences(‘intensiveinformation’)infavorof 3Nonetheless,asGrossmanand Helpman(1998),weassumeawaytheproblemthatfree riding createstotheorganizationofcollectiveaction(Olson,1965). 6 widerparticipationtothepolicymakingprocess (‘extensiveinformation’) (Dahl, 1994). Theremainderofthepaperconsistsof fouradditionalsections.The…rst introducesthemodel. Afterpresentingthepoliticalequilibriumconcept,the second solvesthemodeland commentsonthe e¢ciencyofthepolicyoutcome. Thethirdstudiesthe emergence ofendogenouseconomicand politicalcyclesin relationtotheunderlyingparameters.Thefourthconcludes. 2.Themodel 2.1.Economics Consideranoverlapping generationsframeworkconsisting ofagentswholivefor twoperiodsonly.Atanymomentintimetwo generationsarealive:theold Oand theyoungYwithlifetimehorizonsofoneand twoperiodsrespectively. Populationgrowsatacostantraten. Eachgenerationismadeofhomogeneousagents.Atbirththelifetimepreferencesoftherepresentativeagentbornat timetarerepresented bythefollowing intertemporalutilityfunction: ut=ct t+½ct t+1(2.1) wherect sisconsumptionat timesoftheagentbornattand ½2(0;1)isthe discountfactor. Independentlyfromtheirgeneration,all agents supplyinelasticallyoneunit ofthesolefactorofproduction,saylaborL,whichisemployedtoproduce a unique consumptiongoodXunderconstantreturnstoscale.Atanypointin timeper-capita outputisgiven by: xt=¸A®(2.2) wherextistheoutputshareofeachindividualaliveat timet,and ¸A®islabor productivity.The…nalgoodcannotbestoredand therearenocapitalmarkets. Thus, ineach periodand foreachgeneration,consumptionequalsdisposable income. Laborproductivityimprovesintimeduetoprocess innovation.Progress comesintheformofnewvintages®oftechnology.Eachvintageinducesan 7 improvementofsize A2(1;1).However,thefull exploitationofanewvintage technologyrequireslearning-bydoing.In particular,weassumethatlearning takesoneperiodsothat¸2(0;1)whenthenewvintageisintroducedand ¸=1 afteroneperiod.Moreover,partofthelearning obtainedontheoldvintagespills overtothenewvintage:¸=¸iflearning-by-doingdid notoccurontheold vintage,and ¸=¸>¸ifitoccurred. Accordingly,when decidingwhethertosubstitutethe existingvintage®with thenewvintage®+1,agentsmayface atrade-o¤betweentheproductivitygains oflearning-by-doing and thoseofprocess innovation.In particular,thisisthe caseif:¸A<1<¸A(2.3) The existence ofatrade-o¤betweeninnovationand learning-by-doingcreates apotential intergenerationalcon‡ict.Theold,whowill notbetherenextperiod, maypreferthe currentproductivitygainsarisingfromlearning onthe existing vintage. Onthe contrary,theyoung,whowill bealivenextperiod,maylike totradesuchgainsforfutureproductivityimprovements stemmingfromcurrent innovation. 2.2.Politics Innovation policyistheoutcomeofaprocess ofinterestintermediation bypublic regulators.Regulatorsareassumedtobeshort-livedinthattheyremainincharge foroneperiodonlyand theyareall identical(Grossmanand Helpman,1998). On theonehand,theyhavenoinherentpreferencesaboutpoliciesand areapriori unawareofthe existence aswell asthepotentialofnewvintages sothat,when leftalone,theymaintainthestatusquotechnology. Ontheotherhand,theycan beforcedinto action byspecial interests. Wemodelthemechanismofinterestintermediationasacommonagency game.Eachgeneration hastheopportunityofgetting organizedasapressure group inordertoin‡uence theregulator’sdecisionthroughcollectiveactivities. Theseactivitiesmaymaterialize insupportdemonstrationsorinvarious sortsof directand indirectside-paymentstotheincumbentregulator,suchasbribesand campaigncontributions.Duetocoordination problems,suchcollectiveactivities absorbresources. Onlyifapressuregroup spendsapositiveamountofresources, theregulatorisabletohearitsvoice.The e¢caciesofcollectiveactivitiesdepends 8 higherisnthelargeristhelobbyoftheyoung and thelargeristheiraggregate contributionrelativetothe contributionoftheold.Thus,the equilibrium withcontinuousinnovationsismorelikelyto arisewhentherateofgrowthof populationishigh. 5.Conclusion Inthispaper,we constructedamodelwheretheinteraction betweenorganized special interestsand thepolicymakersgeneratesapoliticalequilibriumwhich involveseithercontinuousprocess innovationsorperiodsoftechnologicalchange followed byperiodsofstagnation(i.e.technologicalcycles).Theprevailingequilibriumdependsontechnologicaland preference parameters,and notonlyonthe demographicstructureofthepopulationasithappensin‘democratic’models. Morespeci…cally,equilibriumtechnologicalcyclesarelikelyto arisewhenagents putlittlevalueonfuture consumption,whenthepositive externalityonfuture productivitygainsofcurrentlearning-by-doingishighand whenthefutureproductivitygainsthatdonotdepend onthefull exploitationofcurrent technology arelow.Inanycase,technologicalchangeisaccompanied byendogenouscyclesof lobbies’formationand,becausetheinterestsof futuregenerationsarenot taken into account, itwill begenerallyine¢cientfromadynamicpointofview.International incomedi¤erencescould betraced backtomoreorless severeproblems ofinterestrepresentationand policymakers’planninghorizons. References [1]Aghion,P., and P.Howitt (1998)EndogenousGrowthTheory(Cambridge (Mass.):MITPress). [2]Ainsworth,S.(1993)Regulatinglobbyistsand interestgroupsin‡uence, JournalofPolitics55,41-56. [3]Austen-Smith,D.and J.R.Wright (1992)Competitivelobbyingforalegislator’svote,SocialChoice andWelfare9,229-257. 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