A COOPERATIVE DIFFERENTIAL GAME ANALYSIS OF TRADE, CAPITAL MOVEMENT AND TECHNOLOGY TRANSFER BETWEEN DEVELOPED AND DEVELOPING ECONOMIES

In this study, a dynamic two-economy world model, developed and developing, is constructed, which incorporates the fundamental asymmetry in the production structure between two economies. The developing economy produces only consumption goods and relies on the developed economy for its supply of capital goods. The developed economy produces both consumption and capital goods.; Capital tends to move from the high-technology economy to the developing economy. Therefore, the developed economy's foreign investment in the developing economy causes an accompanying transfer of technical expertise. It is shown that this dynamic two economy world has stable steady state paths.; Optimal control techniques are applied to this world economic system to determine the Pareto efficiency frontier in the realized outcome space. In order to explain how a specific point on this frontier is chosen as a solution, a nonsymmetric Nash bargaining analysis is introduced.; Among all the possible solutions on the frontier, the solution generating balanced growth to the world economy is described. On this balanced growth path, the two-economy world is systematically integrated and works as if it is one economy. The specific nonsymmetric Nash bargaining situation that will give rise to this balanced growth solution is also analyzed. In addition, the robustness of nonsymmetric Nash bargaining analysis provides further insight in explaining balanced growth solution of the world economy.; Several interesting properties implied by this balanced growth solution on the Pareto efficiency frontier are analyzed, including the golden rule of accumulation for each economy, optimal capital movement, and optimal technology transfer. During this process, an interesting intereconomy system aggregation is obtained. This makes it possible to prove the saddle point stability of the world system on the balanced growth solution point. An important policy implication obtained on the balanced growth path is that a government should not interrupt free movement of capital and technology transfer between developed and developing economies.; The idea presented in this study was the application of nonsymmetric Nash bargaining analysis to international trade theory. The results obtained as solutions to the nonsymmetric Nash bargaining game bear significancies for the existing traditional approaches in trade and growth theory.