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Organizational Equilibrium with Capital

Author

Listed:
  • Bassetto, Marco
  • Huo, Zhen
  • Ríos-Rull, José-Víctor

Abstract

This paper proposes a new equilibrium concept - organizational equilibrium - for models with state variables that have a time-inconsistency problem. The key elements of this equilibrium concept are: (1) agents are allowed to ignore the history and restart the equilibrium; (2) agents can wait for future agents to start the equilibrium. We apply this equilibrium concept to a quasi-geometric discounting growth model and to a problem of optimal dynamic fiscal policy. We find that the allocation gradually transits from that implied by its Markov perfect equilibrium towards that implied by the solution under commitment, but stopping short of the Ramsey outcome. The feature that the time inconsistency problem is resolved slowly over time rationalizes the notion that good will is valuable but has to be built gradually.

Suggested Citation

  • Bassetto, Marco & Huo, Zhen & Ríos-Rull, José-Víctor, 2018. "Organizational Equilibrium with Capital," CEPR Discussion Papers 13403, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13403
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    References listed on IDEAS

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    More about this item

    Keywords

    Capital-Income Taxation; Quasi-Geometric Discounting; Renegotiation; reputation; Time Inconsistency;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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