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Continua of underemployment equilibria

Author

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  • DREZE, Jacques H.

    () (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

  • HERINGS, P. Jean-Jacques

    () (Department of Econometrics and CentER, P.O. Box 90153, 5000 LE Tilburg, The Netherlands)

Abstract

In this paper the existence of unemployment is partly explained as being the result of coordination failures. This is achieved by considering a standard general equilibrium model and splitting the set of commodities in two groups. The first group contains commodities like gold. The prices of these commodities are fully flexible, even in the short run, and their markets always clear. The prices of the commodities in the second group are rigid in the short run (for instance labour services or some consumer goods) and households and firms may expect restricted supply possibilities. Whe show that such expectations are selfenforcing, even if all prices of commodities in the second group are competitive. In that case it is shown that as a result of coordination failures a continuum of equilibria results, among which an equilibrium with approximately no trade inthe commodities of the second group, and a Walrasian equilibrium. In fact, these coordination failures also arise at other price systems, but then unemployment is the result of both a wrong price system and coordination failures. Moreover, some properties of the set of equilibria are analysed. Generically, there exists a continuum of non-indifferent equilibrium allocations. Under a condition implied by gross substitutability, there exists a continuum of equilibrium allocations in the neighbourhood of a competitive allocation. Examples show that the latter property may not hold in general.

Suggested Citation

  • DREZE, Jacques H. & HERINGS, P. Jean-Jacques, 1998. "Continua of underemployment equilibria," CORE Discussion Papers 1998045, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:1998045
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    References listed on IDEAS

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    1. Mas-Colell,Andreu, 1990. "The Theory of General Economic Equilibrium," Cambridge Books, Cambridge University Press, number 9780521388702.
    2. Jones, Larry E & Manuelli, Rodolfo E, 1992. "The Coordination Problem and Equilibrium Theories of Recessions," American Economic Review, American Economic Association, vol. 82(3), pages 451-471, June.
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    6. Laan, Gerard van der, 1982. "Simplicial approximation of unemployment equilibria," Journal of Mathematical Economics, Elsevier, vol. 9(1-2), pages 83-97, January.
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    Citations

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    Cited by:

    1. DREZE, Jacques, 1999. "On the macroeconomics of uncertainty and incomplete markets," CORE Discussion Papers 1999064, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Sander van der Hoog, 2004. "Credit and Cash-in-Advance in Disequilibrium Models," Computing in Economics and Finance 2004 294, Society for Computational Economics.
    3. Alessandro Citanna & Hervé Crès & Jacques H Drèze & P. Jean-Jacques Herings & Antonio Villanacci, 2001. "Underemployment of Resources and Self-Fulfilling Beliefs: Nonwalrasian Allocations at Walrasian Prices," Working Papers hal-01064886, HAL.
    4. DRÈZE, Jacques, 2001. "Indeterminateness of equilibria and macroeconomics," CORE Discussion Papers 2001058, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Jacques H. Drèze, 2000. "Sur la macroéconomie de l'incertitude et des marchés incomplets," Revue de l'OFCE, Programme National Persée, vol. 72(1), pages 7-37.

    More about this item

    Keywords

    General equilibrium; underemployment; coordination failures; indeterminacy.;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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