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Welfare of Alternative Equilibrium Paths in the Kiyotaki-Wright Model

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  • Juan M. Romero

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    (Departamento de Economia, Instituto Tecnologico Autonomo de Mexico (ITAM))

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    Abstract

    I provide new existence and welfare results for the Kiyotaki-Wright model (JPE, 1989). Previous work on the model has focused almost exclusively on steady-states and has established the existence of multiple steady-states. Moreover, welfare comparisons among steady-states are of dubious significance because transitions are ignored. For mixed strategies that restrict agents to play a unique strategy for each opportunity set (which as shown in Kehoe-Kiyotaki-Wright (ET, 1993) implies that the number of steady-state is generically finite). I prove that there exists an equilibrium in which the most costly to-store good has the highest acceptance rate. Furthermore, this equilibrium Pareto dominates equilibria in which less costly to- store goods are universally accepted. I also display multiple equilibria in which only pure strategies are played. Among these is one in which the universally accepted good is the least costly to-store and another in which the universally accepted good is the second least costly to-store. For some initial conditions both exist and the latter is better according to a representative-agent-type welfare criterion. Thus, my results show (1) that there often exist equilibria in which objects with poor storage properties are widely accepted and (2) that these equilibria have good welfare properties in relation to those in which better objects are widely accepted.

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    Bibliographic Info

    Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 9502.

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    Length: 34 pages
    Date of creation: Jul 1995
    Date of revision:
    Handle: RePEc:cie:wpaper:9502

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