General Equilibrium in a Simple Economy with Imperfect Information
The author determines equilibrium in a simple economy with imperfect information. Each risk-neutral household acts as a firm, making wage offers according to an endogenous wage distribution, and as a laborer, sampling a stochastic number of offers made by other households over its search period. This economy with imperfect information and decentralized production and consumption will not maximize welfare. Policy must be carefully formulated because there are two nontrivial equilibria: an unstable Keynesian underemployment equilibrium with coordination failure resulting in underemployment and reduced search effort and a stable high-effort, low-unemployment equilibrium that is reminiscent of a classical equilibrium with frictional unemployment.
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Volume (Year): 27 (1994)
Issue (Month): 2 (May)
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