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Endogenous Strategic Business Cycles

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This paper examines an overlapping generations version of the Shapley-Shubik market game. We show existence of equilibria for the simple one commodity model and analyze the dynamics of the equilibrium trajectories generated in the model. Because of the non-linearities generated by strategic interaction of agents in the model, we find that complex and chaotic equilibrium dynamics are possible in this model for a much broader range of preferences than those for which Grandmont (1985) found complicated dynamics in the perfectly competitive version of this model. These results, then, provide an alternative to the usual technology-based explanation for the historical fact that business cycles became an important economic phenomenon only with the onset of industrialization.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2.

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Handle: RePEc:cmu:gsiawp:2

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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
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  1. Woodford, Michael, 1990. "Learning to Believe in Sunspots," Econometrica, Econometric Society, vol. 58(2), pages 277-307, March.
  2. Postlewaite, A & Schmeidler, David, 1978. "Approximate Efficiency of Non-Walrasian Nash Equilibria," Econometrica, Econometric Society, vol. 46(1), pages 127-35, January.
  3. Jordi Galí, 1993. "Monopolistic competition, business cycles and the composition of aggregate demand," Economics Working Papers 45, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Shapley, Lloyd S & Shubik, Martin, 1977. "Trade Using One Commodity as a Means of Payment," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 937-68, October.
  5. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
  6. Forges, Francoise & Peck, James, 1995. "Correlated Equilibrium and Sunspot Equilibrium," Economic Theory, Springer, vol. 5(1), pages 33-50, January.
  7. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
  8. Benhabib, J. & Farmer, R.E.A, 1991. "Indeterminacy and Increasing Returns," Papers 165, Cambridge - Risk, Information & Quantity Signals.
  9. Balasko, Yves & Cass, David & Shell, Karl, 1980. "Existence of competitive equilibrium in a general overlapping-generations model," Journal of Economic Theory, Elsevier, vol. 23(3), pages 307-322, December.
  10. Balasko, Yves & Shell, Karl, 1980. "The overlapping-generations model, I: The case of pure exchange without money," Journal of Economic Theory, Elsevier, vol. 23(3), pages 281-306, December.
  11. Spear, Stephen E. & Srivastava, Sanjay & Woodford, Michael, 1990. "Indeterminacy of stationary equilibrium in stochastic overlapping generations models," Journal of Economic Theory, Elsevier, vol. 50(2), pages 265-284, April.
  12. Peck, James & Shell, Karl & Spear, Stephen E., 1992. "The market game: existence and structure of equilibrium," Journal of Mathematical Economics, Elsevier, vol. 21(3), pages 271-299.
  13. Spear, Stephen E., 1985. "Rational expectations in the overlapping generations model," Journal of Economic Theory, Elsevier, vol. 35(2), pages 251-275, August.
  14. Peck, James & Shell, Karl, 1991. "Market Uncertainty: Correlated and Sunspot Equilibria in Imperfectly Competitive Economies," Review of Economic Studies, Wiley Blackwell, vol. 58(5), pages 1011-29, October.
  15. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
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Cited by:
  1. Breton, Michele & St-Amour, Pascal & Vencatachellum, Desire, 2003. "Dynamic production teams with strategic behavior," Journal of Economic Dynamics and Control, Elsevier, vol. 27(5), pages 875-905, March.
  2. Aditya Goenka & Lin Liu, 2012. "Infectious diseases and endogenous fluctuations," Economic Theory, Springer, vol. 50(1), pages 125-149, May.
  3. Orrego, Fabrizio, 2010. "Demography, stock prices and interest rates: The Easterlin hypothesis revisited," Working Papers 2010-012, Banco Central de Reserva del Perú.
  4. Aditya Goenka, 2000. "Informed Trading and the "Leakage" of Information," Economics Discussion Papers 528, University of Essex, Department of Economics.
  5. Goenka, Aditya & Poulsen, Odile, 2004. "Factor Intensity Reversal and Ergodic Chaos," Working Papers 04-13, University of Aarhus, Aarhus School of Business, Department of Economics.
  6. Ghosal, Sayantan & Morelli, Massimo, 2004. "Retrading in market games," Journal of Economic Theory, Elsevier, vol. 115(1), pages 151-181, March.
  7. Amir, Rabah & Bloch, Francis, 2009. "Comparative statics in a simple class of strategic market games," Games and Economic Behavior, Elsevier, vol. 65(1), pages 7-24, January.
  8. Indrajit Ray & Herakles Polemarchakis, 2004. "Sunspots, Correlation And Competition," Royal Economic Society Annual Conference 2004 89, Royal Economic Society.
  9. William A. Barnett & Yijun He & ., 1999. "Stabilization Policy as Bifurcation Selection: Would Keynesian Policy Work if the World Really were Keynesian?," Macroeconomics 9906008, EconWPA.
  10. Bloch, Francis & Ferrer, Helene, 2001. "Trade Fragmentation and Coordination in Strategic Market Games," Journal of Economic Theory, Elsevier, vol. 101(1), pages 301-316, November.
  11. William A. Barnett & Yijun He, 1999. "Center Manifold, Stability, and Bifurcations in Continuous Time Macroeconometric Systems," Macroeconomics 9901002, EconWPA.
  12. Peck, James, 2003. "Large market games with demand uncertainty," Journal of Economic Theory, Elsevier, vol. 109(2), pages 283-299, April.
  13. Kunieda, Takuma, 2008. "Finance and Growth Cycles," MPRA Paper 11340, University Library of Munich, Germany.

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