Appendix: Negative Investment: Incorporating a Complementarity into the Dynamic GTAP Model

Summary

It has been found that in some cases the investment mechanisms in the GDyn model can result in gross investment falling below zero. This will occur when the investment mechanisms cause the actual rate of return to rise considerably, lowering investment to unacceptable levels; for example, if there is a large error in expectations (the expected rate of return far exceeds the actual rate) or the expected and actual rates of return are far below the target rate of return.

In this appendix a complementarity is introduced to ensure that in these cases investment does not fall below a minimum level. We use the method developed by Harrison, Horridge, Pearson and Wittwer (2002) for introducing complementarities. The method is designed specifically for models implemented using the GEMPACK software.

First the equations from the GDyn model are used to demonstrate the negative investment problem in the GDyn model. Following this we introduce the complementarity and show, using the example, how the complementarity works.

Negative Investment

Here we outline an example of the case where investment falls to an unacceptable level. The example is based on a small 7 commodities by 7 region aggregation of the GDyn Data Base.