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Indivisibilities, lotteries, and sunspot equilibria

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  • Karl Shell
  • Randall Wright

Abstract

We analyze economies with indivisible commodities. There are two reasons for doing so. First, we extend and provide new insights into sunspot equilibrium theory. Finite competitive economies with perfect markets and convex consumption sets do not allow sunspot equilibria; these same economies with nonconvex consumption sets do, and they have several properties that can never arise in convex environments. Second, we provide a reinterpretation of the employment lotteries used in contract theory and in macroeconomic models with indivisible labor. We show how socially optimal employment lotteries can be decentralized as competitive equilibria once sunspots are introduced.

Suggested Citation

  • Karl Shell & Randall Wright, 1991. "Indivisibilities, lotteries, and sunspot equilibria," Staff Report 133, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:133
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    References listed on IDEAS

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