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Robustness of sunspot equilibria

Listed author(s):
  • Karl Shell

    (Department of Economics, Cornell University, 402 Uris Hall, Ithaca NY 14853-7601, USA)

  • Aditya Goenka

    (Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, UK)

A sunspot equilibrium (SSE) is based on some extrinsic randomizing device (RD). We analyze the robustness of SSE. (1) We say that an SSE allocation is robust to refinements if it is also an SSE allocation based on any refinement of its RD. (2) We introduce two core concepts for analyzing the robustness of SSE in the face of cooperative-coalition formation. In the first, the blocking allocations are based on the RD that defines the SSE. In the second (stronger) core concept, coalitions select their own RDs. For the convex economy with restricted market participation, SSE allocations are robust under each of the definitions and the cores converge on replication of the economy to the set of SSE allocations. For the economy with an indivisible good, SSE allocations are not always robust. We provide examples of each of the following: (i) an SSE allocation that is not robust to refinement, (ii) an SSE allocation that is in neither core, (iii) an SSE allocation that is in the first core, but not in the second, and (iv) a core that does not converge upon replication to the set of SSE allocations.

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Article provided by Springer & Society for the Advancement of Economic Theory (SAET) in its journal Economic Theory.

Volume (Year): 10 (1997)
Issue (Month): 1 ()
Pages: 79-98

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Handle: RePEc:spr:joecth:v:10:y:1997:i:1:p:79-98
Note: Received: July 31, 1995; revised version August 30, 1996
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