Irreversibility, Uncertainty and Underemployment Equilibria
In a competitive overlapping generation model, underutilization of labor and equipment can be due to the combinaison of irreversibility of human capital, physical capital and technology with idiosyncratic productivity shocks. Irreversibilities and uncertainty generate an inefficient allocation of resources among sectors, which takes the form of underemployment and underutilization of capacities at the aggregate level and affects the equilibrium path of capital. We provide examples in which this missallocation, called structural "mismatch", can be responsible, a.o., for an "inescapable poverty trap", or for periodic orbits generating endogenous fluctuations in underemployment.
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|Date of creation:||01 Nov 1993|
|Date of revision:||00 Oct 1994|
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- Diamond, Peter & Fudenberg, Drew, 1989.
"Rational Expectations Business Cycles in Search Equilibrium,"
Journal of Political Economy,
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