Appendix C: Analysis of the dynamics and the proof of Proposition A4
This Appendix analyzes the dynamics of the model and thereby proves Proposition A4, which examines the relationship between initial conditions and steady states. In this Appendix, P(Fht,Fmt,B) when FFht
mt≥(FFh
m)hmis denoted asPb(Fht+Fmt,B),becauseP(Fht,Fmt,B) depends onFht+Fmt, not Fht and Fmt individually (from eq. 15).
The following lemmas are used to examine the dynamics.
Lemma C1When B0≤B∗(Fh0), Bt≤B∗(Fht) for any t >0.
Proof. Suppose Bt≤B∗(Fht) at t≥0. SinceFht+1≥Fht, B∗(Fht+1)≥B∗(Fht). Thus, when Bt+1 is determined by (37) or (39), Bt+1≤B∗(Fht)≤B∗(Fht+1). When Bt+1 is determined by (33) or (35), Bt+1 < B∗(Fht+1) from B∗(Fht,Fmt)< B∗(Fht)≤B∗(Fht+1), where the first inequality is from Fmt<max{φ(Fht,Bt),[(FFh
m)ml,θ]−1}Fht, (34), (36), (38), and (40). When Bt+1 is determined by (29) or (31), Bt+1 < B∗(Fht+1) from Bb∗(Fht+Fmt)< B∗(Fht,Fmt0 ) <
B∗(Fht)≤B∗(Fht+1), where Fmt0 ∈
³
[(FFmh)hm]−1Fht,max{φ(Fht,Bt),[(FFmh)ml,θ]−1}Fht
´
and the first inequality is from (30), (32), (34), and (36).
Lemma C2Suppose B0≤B∗(Fh0). Then, (i)When FFmtht ∈
h
(FFmh)ml,θ,(FFmh)hm
´
andP(Fht,Fmt,B∗(Fht,Fmt))AT≤1−γbγ(1+r)
b em,P(Fht,Fmt,Bt)AT>
1−γb(1+r)
γb em is possible only if Fht > Fh[. Similarly, when FFmtht ≥ (FFmh)hm and Pb(Fht+ Fmt,Bb∗(Fht+Fmt))AT ≤ 1−γγb(1+r)
b em, Pb(Fht+Fmt,B)AT > 1−γγb(1+r)
b em is possible only if Fht> Fh[.
(ii)When FFmtht ∈ h
(FFmh)ml,θ,(FFmh)hm
´
and P(Fht,Fmt,B∗(Fht,Fmt)) ≤ θ, P(Fht,Fmt,Bt) > θ is possible only ifFht> Fh†. Similarly, when FFmtht ≥(FFmh)hm and Pb(Fht+Fmt,Bb∗(Fht+Fmt))≤θ, Pb(Fht+Fmt,B)> θ is possible only if Fht> Fh†.
Proof. When B0≤B∗(Fh0),Bt≤B∗(Fht) for any t from Lemma C1.
(i) Suppose Fht≤Fh[. Since Bt≤B∗(Fht), φ(Fht,B∗(Fht))Fht≤φ(Fht,Bt)Fht and thus, for any Fh> Fht, Fm=φ(Fh,Bt)Fh is located at the right side of Fm=φ(Fh,B∗(Fh))Fh on the (Fm,Fh) plane (see Figure 1). Hence, Fh[(Bt)> Fh[ (see the figure). At given Fh and Fm satisfying FFmh ∈
h
(FFmh)ml,θ,(FFmh)hm
´
, the absolute value of the slope of the equi P(Fh,Fm,B) curve on the (Fm,Fh) plane is strictly greater than that of the equi P(Fh,Fm,B∗(Fh,Fm)) curve from (15), (25), and wfh>wfm. Hence, P(Fh,Fm,Bt)AT=1−γγb(1+r)
b em (b∗(wl) =em when
Fh
Fm∈ h
(FFh
m)ml,θ,(FFh
m)hm
´
) is located above P(Fh,Fm,B∗(Fh,Fm))AT =1−γγb(1+r)
b em on the plane.
Therefore, when P(Fht,Fmt,B∗(Fht,Fmt))AT ≤ 1−γγb(1+r)
b em, P(Fht,Fmt,Bt)AT > 1−γγb(1+r)
b em is possible only ifFht> Fh[. When FFht
mt≥(FFh
m)hm, the slopes of bothPb(Fht+Fmt,B)AT=1−γγb(1+r)
b em and Pb(Fht+Fmt,Bb∗(Fht+Fmt))AT =1−γγb(1+r)
b em equal −1 from (21) and (26). Hence, when Pb(Fht+Fmt,Bb∗(Fht+Fmt))AT ≤1−γγb(1+rb )em, Pb(Fht+Fmt,B)AT>1−γγb(1+rb )em is possible only if Fht> Fh[. (ii) Can be proved in a similar way as (i) (see Figure 2).
Figure 1: Proof of Lemma C2 (i)
Figure 2: Proof of Lemma C2 (ii)
(I) Dynamics when
FFhtmt
< w f
m−1h
1−γb(1+r) γb
e
mi
From Proposition 1, when FFht
mt <(FFh
m)hm, Lht=Fht, Lmt= min{φ(Fht,Bt)Fht,Fmt} for Fht<
Fh†(Bt),and Lmt= min{[(FFh
m)ml,θ]−1Fht,Fmt} for Fht≥Fh†(Bt), where φ(Fht,Bt)>[(FFh
m)ml,θ]−1 for Fht< Fh†(Bt). Since LLmtht =LFmtht ≤(FFmh)ml,θ, wgmt<1−γbγ(1+r)
b eh and thusLht=Fht is constant.
[1]
When Fht< Fh[Since Bt≤B∗(Fht)< B∗(Fh[) from Lemma C1, Fht< Fh[≡Fh[(B∗(Fh[))< Fh[(Bt) and thus f
wm(φ(F1
ht,Bt)) < 1−γbγ(1+r)
b em (see Figure 4). Since Bt < B∗(Fh[) < B∗(Fh†), Fht < Fh† ≡ Fh†(B∗(Fh†))< Fh†(Bt) and thus LLmtht = min{φ(FhtF,Bhtt)Fht,Fmt}. Hence, wgmt < 1−γbγ(1+r)b em and Fmt decreases over time.
(a)When Fmt≤φ(Fht,B∗(Fht))Fht
Since Fmt ≤φ(Fht,B∗(Fht))Fht ≤φ(Fht,Bt)Fht, Lmt =Fmt and the dynamics equation of Bt is (33), whose fixed point is B∗(Fht,Fmt). Since Fmt decreases over time, Fmt<
φ(Fht,B∗(Fht))Fht< φ(Fht,Bt)Fht continues to hold, where the second inequality is from B∗(Fht)≡B∗(Fht,φ(Fht,B∗(Fht))Fht)> B∗(Fht,Fmt). Eventually, the economy transits to a case satisfying FFmtht ≥wfm−1
h1−γb(1+r) γb em
i
and Fht< Fh[< Fh[(Bt) (case [1](a) i of (II), or case [1](a) i A of (III), (IV), or (V) below).
(b)When Fmt> φ(Fht,B∗(Fht))Fht
i.When Fmt≤φ(Fht,Bt)Fht and thus Lmt=Fmt
Since Bt< B∗(Fht)≡B∗(Fht,φ(Fht,B∗(Fht))Fht)≤B∗(Fht,Fmt), Bt increases. Since Bt in- creases andFmt decreases over time, the economy transits to eitherFmt> φ(Fht,Bt)Fht (case ii),Fmt≤φ(Fht,B∗(Fht))Fht (case (a)), or a case satisfying FFmtht ≥wfm−1h
1−γb(1+r) γb em
i and Fht< Fh[< Fh[(Bt) (case [1](a) i of (II), or case [1](a) i A of (III), (IV), or (V)).
ii.When Fmt≥φ(Fht,Bt)Fht
Since Lmt = φ(Fht,Bt)Fht and Bt ≤ B∗(Fht), Bt non-decreases. Since Fmt decreases and Bt non-decreases over time, the economy transits to either Fmt ≤φ(Fht,Bt)Fht (case i),Fmt≤φ(Fht,B∗(Fht))Fht (case (a)), or a case satisfying FFmtht ≥wfm−1
h1−γb(1+r) γb em
i and Fht < Fh[ < Fh[(Bt) (case [1](a) i of (II), or case [1](a) i A of (III), (IV), or (V)).
The economy does not transit between this case and case i forever, because, withFmt decreasing, Fmt≤φ(Fht,B∗(Fht))Fht does hold at some point.
[2]
When Fht≥Fh[ and thusFmt> φ(Fht,B∗(Fht))Fht (a)When Fht< Fh[(Bt)This case arises only when Bt< B∗(Fh[) because Fh[≡Fh[(B∗(Fh[))< Fh[(Bt). As shown in [1], Fmt decreases over time.
i.When Fmt≤φ(Fht,Bt)Fht
Since Bt< B∗(Fht) =B∗(Fht,φ(Fht,B∗(Fht))Fht)< B∗(Fht,Fmt), Bt increases. Since Fmt decreases and Bt increases, the economy transits to either Fmt> φ(Fht,Bt)Fht (case ii), Fht≥Fh[(Bt) (case (b)), or a case satisfying FFmtht ≥wfm−1
h1−γb(1+r) γb em
i
and Fht≥Fh[ eventually.
ii.When Fmt> φ(Fht,Bt)Fht
Since Lmt=φ(Fht,Bt)Fht and Bt< B∗(Fht), Bt increases. Since Fmt decreases and Bt increases, the economy transits to eitherFmt≤φ(Fht,Bt)Fht (case i),Fht≥Fh[(Bt) (case (b)), or a case satisfying FFmtht ≥wfm−1
h1−γb(1+r) γb em
i
and Fht≥Fh[. Note that the economy does not transit between this case and case i forever, because, with Bt increasing and Fht≥Fh[≡Fh[(B∗(Fh[))≥Fh[(B∗(Fht)), Fht≥Fh[(Bt) does hold at some point.
(b)When Fht≥Fh[(Bt)
Since Fmt > φ(Fht,Bt)Fht and thus Lmt =φ(Fht,Bt)Fht, when Fht >(=)Fh[(Bt), wlt = f
wm³
1 φ(Fht,Bt)
´
>(=)1−γbγ(1+r)
b em and Fmt increases (is constant). Since Bt non-decreases from Bt ≤ B∗(Fht), Fht ≥ Fh[(Bt) continues to hold, and the economy converges to (Fh,Fm,B) = (Fht,1−Fht,B∗(Fht)), unless Bt= B∗(Fht) and Fht =Fh[, in which case bothFmt and Bt remain constant.
Summary of the dynamics when FFht
mt<wfm−1
h1−γb(1+r) γb em
i
•WhenFht< Fh[, Fhtis constant andFmtdecreases over time, and eventually the economy transits to a case satisfying FFmtht ≥wfm−1
h1−γb(1+r) γb em
i
and Fht< Fh[< Fh[(Bt).
•When Fht≥Fh[,
–IfFht≥Fh[(Bt),Fhtis constant andFmtincreases, and the economy stays in this case and converges to (Fh,Fm,B) = (Fht,1−Fht,B∗(Fht)) (SS 3), unlessBt=B∗(Fht) andFht=Fh[, in which case both Fmt and Bt are constant.
–If Fht< Fh[(Bt) (thus Bt< B∗(Fh[)),Fht is constant and Fmt decreases, and the economy transits to either the case Fht≥Fh[(Bt) or a case satisfying FFmtht ≥wfm−1
h1−γb(1+r) γb em
i and Fht≥Fh[ eventually.
(II) Dynamics when
FFhtmt
≤ h
f w
m−1h
1−γb(1+r) γbe
mi ,(
FFhm
)
ml,θi
As shown in (I), Lht=Fht is constant, and since Lmt≤Fmt and FFmtht ≥wfm−1
h1−γb(1+r) γb em
i ,Fmt non-decreases over time.
[1]
When Fht< Fh†Since Fht< Fh†≡Fh†(B∗(Fh†))< Fh†(B∗(Fht))≤Fh†(Bt), wlt< θAT. (a)When P(Fht,Fmt,B∗(Fht,Fmt))AT≤1−γγb(1+r)
b em
Since Fmt≤φ(Fht,B∗(Fht))Fht≤φ(Fht,Bt)Fht (as for the first inequality, see Figure 5), Lmt=Fmt.
i.When P(Fht,Fmt,Bt)AT≤1−γbγ(1+rb )em, i.e. b∗(wl)≤em
SinceFmtis constant,P(Fht,Fmt,B∗(Fht,Fmt))AT≤1−γγb(1+r)
b emand thusP(Fht,Fmt,Bt)AT≤
1−γb(1+r)
γb em continue to hold. Hence, the economy stays in this case and converges to (Fh,Fm,B) = (Fht,Fmt,B∗(Fht,Fmt)).
ii.When P(Fht,Fmt,Bt)AT>1−γγb(1+r)
b em and thus Fht> Fh[(Bt)
This case could arise only when Fht> Fh[ from Lemma C2 (i). Since Fmt increases and Bt decreases (because Bt> B∗(Fht,Fmt)) over time, the economy transits to either P(Fht,Fmt,Bt)AT ≤1−γγb(1+r)
b em (case i), a case satisfying P(Fht,Fmt,B∗(Fht,Fmt))AT >
1−γb(1+r)
γb em (a case in (b) or (c)), or a case satisfying FFmtht <wfm−1
h1−γb(1+r) γb em
i and Fht> Fh[ (a case in [2] of (I)).
(b)WhenP(Fht,Fmt,B∗(Fht,Fmt))AT>1−γγb(1+r)
b em(thusFht> Fh[) andFmt≤φ(Fht, B∗(Fht))Fht Since Fmt≤φ(Fht, B∗(Fht))Fht≤φ(Fht,Bt)Fht, Lmt=Fmt. P(Fht,Fmt,B∗(Fht,Fmt))AT >
1−γb(1+r)
γb em continues to hold, sinceFmt non-decreases.
i.When P(Fht,Fmt,Bt)AT≤1−γbγ(1+r)
b em
Bt increases from Bt< B∗(Fht,Fmt). Since Fmt is constant, P(Fht,Fmt,B∗(Fht,Fmt))AT>
1−γb(1+r)
γb em and Fmt≤φ(Fht,B∗(Fht))Fht continue to hold. Thus, the economy transits toP(Fht,Fmt,Bt)AT>1−γbγ(1+r)
b em (case ii).
ii.When P(Fht,Fmt,Bt)AT>1−γγb(1+r)
b em (thus Fht> Fh[(Bt)) Since Fmt increases and P(Fht,Fmt,B∗(Fht,Fmt))AT > 1−γγb(1+r)
b em, P(Fht,Fmt,Bt)AT >
1−γb(1+r)
γb em continues to hold. Thus, the economy transits to either a case satisfying Fmt> φ(Fht,B∗(Fht,Fmt))Fht andP(Fht,Fmt,Bt)AT>1−γbγ(1+r)
b em (case (c) ii or iii) or the case satisfying FFht
mt<wfm−1h
1−γb(1+r) γb emi
, Fht> Fh[, and Fht> Fh[(Bt) (case [2](b) of (I)).
(c)When Fmt> φ(Fht, B∗(Fht))Fht (thusFht> Fh[)
SinceBt≤B∗(Fht)≤B∗(Fht,Fmt),Btnon-decreases over time. Thus,Fmt> φ(Fht, B∗(Fht))Fht
continues to be satisfied.
i.When P(Fht,Fmt,Bt)AT≤1−γbγ(1+r)
b em
Fmt≤φ(Fht, Bt)Fhtholds, becauseFmt> φ(Fht, Bt)Fhtcannot happen fromφ(Fht, Bt)Fht≥ φ(Fht, B∗(Fht))Fht (see Figure 4). ThusLmt=Fmt is constant, whileBt increases from Bt< B∗(Fht,Fmt).Hence, the economy transits to a case satisfyingP(Fht,Fmt,Bt)AT>
1−γb(1+r)
γb em (case ii or iii).
ii.When P(Fht,Fmt,Bt)AT>1−γγb(1+rb )em (thus Fht> Fh[(Bt)) andFmt≤φ(Fht, Bt)Fht
Since Fmt and Bt increase (note Bt < B∗(Fht) ≤ B∗(Fht,Fmt)), P(Fht,Fmt,Bt)AT >
1−γb(1+r)
γb em continues to hold and the economy transits to either Fmt> φ(Fht, Bt)Fht
(case iii) or case [2](b) of (I) FFht
mt<wfm−1
h1−γb(1+r) γb em
i . iii.When Fmt> φ(Fht, Bt)Fht (thus Fht> Fh[(Bt))
Since Lmt=φ(Fht, Bt)Fht, wlt=wfm³
1 φ(Fht,Bt)
´
> 1−γbγ(1+r)
b em and Fmt increases. Since Fmt increases and Bt non-decreases, Fmt> φ(Fht, Bt)Fht continues to be true. Hence, the economy converges to (Fh,Fm,B) = (Fht,1−Fht,B∗(Fht)) in this case or transits to case [2](b) of (I).
