Managing, Inducing, and Preventing Regime Shifts: A Review of the Literature

How do economic agents manage expected shifts in regimes? How do they try to influence or prevent the arrival of such shifts? This paper provides a selective survey of the analysis of regime shifts from an economic view point, with particular emphasis on the use of the tech-niques of optimal control theory and differential games. The paper is organized as follows. Section 2 gives an overview of the concepts of regime shifts, thresholds, and tipping points. Section 3 shows how unknown tipping points affect the optimal current policy of decision makers, with or without ambiguity aversion. Section 4.s focus is on political regime shifts in a two-class economy: how the elite may try to prevent revolution by using policy instruments such as repression, redistribution, and gradual democratization. Section 5 reviews models of dynamic games in resource exploitation involving regime shifts and thresholds. Section 6 reviews some studies of regime shifts in industrial organization theory, with focus on R&D races, including efforts to sabotage rivals in order to prevent entry. Section 7 reviews games of regime shifts when players can manage a Big Push. Section 8 discusses some directions for future research.