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The Probability Approach To General Equilibrium With Production

Author

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  • Martine Quinzii
  • Michael Magill

    (Department of Economics, University of California Davis)

Abstract

We develop an alternative approach to the general equilibrium analysis of a stochastic production economy when firms? choices of investment influence the probability distributions of their output. Using a normative approach we derive the criterion that a firm should maximize to obtain a Pareto optimal equilibrium: the criterion expresses the firm?s contribution to the expected social utility of output, and is not the linear criterion of market value. If firms do not know agents utility functions, and are restricted to using the information conveyed by prices then they can construct an approximate criterion which leads to a second-best choice of investment which, in examples, is found to be close to the first best.

Suggested Citation

  • Martine Quinzii & Michael Magill, 2007. "The Probability Approach To General Equilibrium With Production," Working Papers 80, University of California, Davis, Department of Economics.
    • Handle: RePEc:cda:wpaper:80
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    References listed on IDEAS

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    Cited by:

    1. Milo Bianchi & Rose-Anne Dana & Elyès Jouini, 2022. "Shareholder heterogeneity, asymmetric information, and the equilibrium manager," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(4), pages 1101-1134, June.
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    3. Wozny Lukasz & Growiec Jakub, 2012. "Intergenerational Interactions in Human Capital Accumulation," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 12(1), pages 1-47, June.
    4. Balbus, Łukasz & Reffett, Kevin & Woźny, Łukasz, 2012. "Stationary Markovian equilibrium in altruistic stochastic OLG models with limited commitment," Journal of Mathematical Economics, Elsevier, vol. 48(2), pages 115-132.
    5. Milo Bianchi & Rose-Anne Dana & Elyes Jouini, 2022. "Shareholder heterogeneity, asymmetric information, and the equilibrium manager," Post-Print hal-03693971, HAL.
    6. Jean-Marc Robin & Stéphane Bonhomme & Koen Jochmans, 2014. "Estimating Multivariate Latent-Structure Models," Sciences Po publications 2014-18, Sciences Po.
    7. Carvalho, Jaimilton & Orrillo, Jaime & da Silva, Fernanda Rocha Gomes, 2020. "Probability of default in collateralized credit operations for small business," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    8. Magill, Michael & Quinzii, Martine, 2014. "Anchoring expectations of inflation," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 86-105.

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    More about this item

    Keywords

    equilibrium; production;

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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