Technological spillovers within multi-region models: Intertemporal optimization beyond the Negishi approach

An alternative approach to multi-region modeling will be presented. This approach (called modular approach) is able to reproduce results obtained with the traditional as well as a modified Negishi approach. We redesigned the Negishi approach to make it applicable in modeling technological spillovers induced by foreign direct investments. While the modular approach is able to completely internalize the external effects from technological spillovers, which result in higher welfare gains, the modified Negishi approach cannot completely internalize them. The latter is due to the fact that shadow prices from sectoral production functions are used in order to feed the process of iteratively adjusting the Negishi welfare weights. Under the modular approach, the way of finding an equilibrium solution in a dynamic and multi-regional framework is allocation-based and differs from existing price-oriented methods. We discuss the characteristics of the underlying adjustment algorithm which, in contrast to the joint maximization of the Negishi approach, is embedded in a decentralized optimization process. Results from numerical model experiments will demonstrate the advantage of this novel approach.