One considers a differential game model of capitalism "à la Lancaster". Feedback Nash equilibria and Pareto optimal solutions are characterized under the assumption that the planning horizon is infinite. It is then shown that, by combining a Pareto optimal solution with the Nash feedback equilibrium strategy pair, which plays the role of a treat, one can obtain an efficient equilibrium which is also subgame perfect in the sense of Selten. This result modifies sensibly the previous interpretation of the inherent inefficiency of capitalism.
Published October 1985 , 25 pages