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Continua of underemployment equilibria

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  • DREZE, Jacques H.

    ()
    (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

  • HERINGS, P. Jean-Jacques

    ()
    (Department of Econometrics and CentER, P.O. Box 90153, 5000 LE Tilburg, The Netherlands)

Abstract

In this paper the existence of unemployment is partly explained as being the result of coordination failures. This is achieved by considering a standard general equilibrium model and splitting the set of commodities in two groups. The first group contains commodities like gold. The prices of these commodities are fully flexible, even in the short run, and their markets always clear. The prices of the commodities in the second group are rigid in the short run (for instance labour services or some consumer goods) and households and firms may expect restricted supply possibilities. Whe show that such expectations are selfenforcing, even if all prices of commodities in the second group are competitive. In that case it is shown that as a result of coordination failures a continuum of equilibria results, among which an equilibrium with approximately no trade inthe commodities of the second group, and a Walrasian equilibrium. In fact, these coordination failures also arise at other price systems, but then unemployment is the result of both a wrong price system and coordination failures. Moreover, some properties of the set of equilibria are analysed. Generically, there exists a continuum of non-indifferent equilibrium allocations. Under a condition implied by gross substitutability, there exists a continuum of equilibrium allocations in the neighbourhood of a competitive allocation. Examples show that the latter property may not hold in general.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1998045.

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Date of creation: 01 Aug 1998
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Handle: RePEc:cor:louvco:1998045

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Keywords: General equilibrium; underemployment; coordination failures; indeterminacy.;

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References

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  1. van der Laan, Gerard, 1980. "Equilibrium under Rigid Prices with Compensation for the consumers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 63-73, February.
  2. Roberts, John, 1987. "An Equilibrium Model with Involuntary Unemployment at Flexible, Competitive Prices and Wages," American Economic Review, American Economic Association, vol. 77(5), pages 856-74, December.
  3. Herings, J.J., 1993. "On the Connectedness of the Set of Constrained Equilibria," Papers 9363, Tilburg - Center for Economic Research.
  4. Polterovich, V. M. & Spivak, V. A., 1983. "Gross substitutability of point-to-set correspondences," Journal of Mathematical Economics, Elsevier, vol. 11(2), pages 117-140, April.
  5. Movshovich, Solomon M., 1994. "A price adjustment process in a rationed economy," Journal of Mathematical Economics, Elsevier, vol. 23(4), pages 305-321, July.
  6. Dreze, Jacques H, 1975. "Existence of an Exchange Equilibrium under Price Rigidities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(2), pages 301-20, June.
  7. Heller, Walter Perrin & Starr, Ross M, 1979. "Unemployment Equilibrium with Myopic Complete Information," Review of Economic Studies, Wiley Blackwell, vol. 46(2), pages 339-59, April.
  8. van der LAAN, Gerard, . "Simplicial approximation of unemployment equilibria," CORE Discussion Papers RP -467, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Benassy, Jean-Pascal, 1993. "Nonclearing Markets: Microeconomic Concepts and Macroeconomic Applications," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 732-61, June.
  10. Silvestre, Joaquin, 1980. "Continua of Hahn-unsatisfactory equilibria : Some examples," Economics Letters, Elsevier, vol. 5(3), pages 201-208.
  11. Larry E. Jones & R. E. Manuelli, 1987. "The Coordination Problem and Equilibrium Theories of Recessions," Discussion Papers 753, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. Kurz, Mordecai, 1982. "Unemployment equilibrium in an economy with linked prices," Journal of Economic Theory, Elsevier, vol. 26(1), pages 100-123, February.
  13. P. Jean-Jacques Herings, 1995. "Equilibrium existence results for economies with price rigidities," Economic Theory, Springer, vol. 7(1), pages 63-80.
  14. Laroque, Guy, 1978. "The Fixed Price Equilibria: Some Results in Local Comparative Statics," Econometrica, Econometric Society, vol. 46(5), pages 1127-54, September.
  15. Laroque, Guy & Polemarchakis, Heraklis, 1978. "On the structure of the set of fixed price equilibria," Journal of Mathematical Economics, Elsevier, vol. 5(1), pages 53-69, March.
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Cited by:
  1. Antonio Villanacci & Alessandro Citanna & P. Jean-Jacques Herings & Jacques H Drèze & Hervé Crès, 2001. "Underemployment of Resources and Self-Fulfilling Beliefs: Nonwalrasian Allocations at Walrasian Prices," Sciences Po publications 003, Sciences Po.
  2. DRÈZE, Jacques, 2001. "Indeterminateness of equilibria and macroeconomics," CORE Discussion Papers 2001058, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Herings, P.J.J. & Laan, G. van der & Talman, A.J.J., 1998. "Price-Quantity Adjustment in a Keynesian Economy," Discussion Paper 1998-118, Tilburg University, Center for Economic Research.
  4. Citanna, Alessandro & Cres, Herve & Dreze, Jacques & Herings, P. Jean-Jacques & Villanacci, Antonio, 2001. "Continua of underemployment equilibria reflecting coordination failures, also at Walrasian prices," Journal of Mathematical Economics, Elsevier, vol. 36(3), pages 169-200, December.
  5. DREZE, Jacques, 1999. "On the macroeconomics of uncertainty and incomplete markets," CORE Discussion Papers 1999064, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Sander van der Hoog, 2004. "Credit and Cash-in-Advance in Disequilibrium Models," Computing in Economics and Finance 2004 294, Society for Computational Economics.

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