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Sunspot Equilibria in a Production Economy: Do Rational Animal Spirits Cause Overproduction?

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  • Atsushi Kajii

    ()
    (Institute of Economic Research, Kyoto University)

Abstract

We study a standard two period economy with one nominal bond and one firm. The input of the firm is done in the first period and financed with the nominal bond, and its profits are distributed to the shareholders in the second period. We show that a sunspot equilibrium exists around each efficient equilibrium. The interest rate is lower than optimal and there is over production in sunspot equilibria, under some conditions. But a sunspot equilibrium does not exist if the profit share can be traded as well as the bond.

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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 655.

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Length: 20pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:kyo:wpaper:655

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  1. Atsushi Kajii & Antonio Villanacci & Alessandro Citanna, 1998. "Constrained suboptimality in incomplete markets: a general approach and two applications," Economic Theory, Springer, Springer, vol. 11(3), pages 495-521.
  2. Atsushi Kajii, 1997. "On the Role of Options in Sunspot Equilibria," Econometrica, Econometric Society, Econometric Society, vol. 65(4), pages 977-986, July.
  3. Atsushi Kajii, 2006. "Welfare Gains and Losses in Sunspot Equilibria," KIER Working Papers, Kyoto University, Institute of Economic Research 624, Kyoto University, Institute of Economic Research.
  4. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 193-227, April.
  5. Gottardi, Piero & Kajii, Atsushi, 1999. "The Structure of Sunspot Equilibria: The Role of Multiplicity," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(3), pages 713-32, July.
  6. Goenka, Aditya & Prechac, Christophe, 2006. "Stabilizing sunspots," Journal of Mathematical Economics, Elsevier, vol. 42(4-5), pages 544-555, August.
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