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Stability of the Market Economy in the Presence of Diverse Economic Agents

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  • Mukherji, Anjan

Abstract

The stability of market economy is defined and stability conditions deduced which do not appear to restrict preferences in any significant manner. This assumes importance when considering economies where diversity among agents is known to exist. It is shown that if a condition on the rank of the Jacobian matrix of the excess demand functions at equilibria is satisfied then equilibria will be locally asymptotically stable. When this condition is not met, it is shown how redistributing resources may lead to stable competitive equilibrium. It is also shown how instead of imposing credible penalties, which may cause significant incentive problems, redistributing resources may serve to provide the correct incentives to agents who otherwise might have contributed to market failure.

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File URL: http://hdl.handle.net/10685/21
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File URL: http://repository.ri.jica.go.jp/dspace/bitstream/10685/21/1/JICA-RI_WP_No.8_2010.pdf
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Bibliographic Info

Paper provided by JICA Research Institute in its series Working Papers with number 8.

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Date of creation: 01 Mar 2010
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Handle: RePEc:jic:wpaper:8

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Keywords: Stability of equilibrium ; diverse preferences ; redistribution of resources ; rank condition ; incentives for competitive transactions;

References

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  1. Hirota, Masayoshi, 1985. "Global stability in a class of markets with three commodities and three consumers," Journal of Economic Theory, Elsevier, vol. 36(1), pages 186-192, June.
  2. Hirota, Masayoshi & Hsu, Ming & Plott, Chrales R. & Rogers, Brian W., 2005. "Divergence, closed cycles and convergence in scarf environments: Experiments in the dynamics of general equilibrium systems," Working Papers 1239, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Hildenbrand, Werner, 1983. "On the "Law of Demand."," Econometrica, Econometric Society, vol. 51(4), pages 997-1019, July.
  4. Herbert E. Scarf, 1959. "Some Examples of Global Instability of the Competitive Equilibrium," Cowles Foundation Discussion Papers 79, Cowles Foundation for Research in Economics, Yale University.
  5. Mukherji, Anjan, 1973. "On the Sensitivity of Stability Results to the Choice of the Numeraire," Review of Economic Studies, Wiley Blackwell, vol. 40(3), pages 427-33, July.
  6. Anjan Mukherji, 2008. "Stability of a competitive economy: A reconsideration," International Journal of Economic Theory, The International Society for Economic Theory, vol. 4(2), pages 317-336.
  7. Anderson, Christopher M. & Plott, Charles R. & Shimomura, K.-I.Ken-Ichi & Granat, Sander, 2004. "Global instability in experimental general equilibrium: the Scarf example," Journal of Economic Theory, Elsevier, vol. 115(2), pages 209-249, April.
  8. Anjan Mukherji, 2003. "Global Stability Conditions on the Plane," ISER Discussion Paper 0589, Institute of Social and Economic Research, Osaka University.
  9. Venkatesh Bala, 1997. "A pitchfork bifurcation in the tatonnement process," Economic Theory, Springer, vol. 10(3), pages 521-530.
  10. Hirota, Masayoshi, 1981. "On the Stability of Competitive Equilibrium and the Patterns of Initial Holdings: An Example," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(2), pages 461-67, June.
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