Government Policy and Probabilistic Equilibrium Selection
We study an economy where search frictions create a coordination problem among agents - each agent wants to produce if and only if enough other agents are producing. This environment easily generates multiple Pareto-ranked equilibria. Our interest is in how likely it is that the economy will find its way to each of these equilibria when agents are learning about some fundamental parameters of the economy. Specifically, we study Bayesian learning and show how this process generates a probability distribution over the equilibrium set. We then study a particular type of demand-management policy that the government can use to encourage agents to engage in production. We show that this policy can make it more likely that the economy converges to the Pareto superior equilibrium, but that in the process it reduces the value of being in that equilibrium. Hence a tradeoff arises in this model between the likelihood of attaining a particular equilibrium and the value of being in it. We analyze this tradeoff in the context of a numerical example.
|Date of creation:||01 Aug 2000|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Keister, Todd, 1998. "Money Taxes and Efficiency When Sunspots Matter," Journal of Economic Theory, Elsevier, vol. 83(1), pages 43-68, November.
- Bennett T. McCallum, 1981.
"On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective,"
NBER Working Papers
0684, National Bureau of Economic Research, Inc.
- McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
- Woodford, Michael, 1990.
"Learning to Believe in Sunspots,"
Econometric Society, vol. 58(2), pages 277-307, March.
- Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 40(1), pages 128-137, October.
- Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
- Diamond, Peter A, 1982.
"Aggregate Demand Management in Search Equilibrium,"
Journal of Political Economy,
University of Chicago Press, vol. 90(5), pages 881-94, October.
- Grandmont Jean-michel, 1985.
"Stabilizing competitive business cycles,"
CEPREMAP Working Papers (Couverture Orange)
- Aiyagari, S. Rao & Wallace, Neil, 1997.
"Government Transaction Policy, the Medium of Exchange, and Welfare,"
Journal of Economic Theory,
Elsevier, vol. 74(1), pages 1-18, May.
- S. Rao Aiyagari & Neil Wallace, 1995. "Government transaction policy, the medium of exchange, and welfare," Working Papers 516, Federal Reserve Bank of Minneapolis.
- Howitt, Peter & McAfee, R Preston, 1992.
American Economic Review,
American Economic Association, vol. 82(3), pages 493-507, June.
- Ricardo A. Lagos, .
""An Alternative Approach to Market Frictions: An Application to the Market for Taxicab Rides'',"
CARESS Working Papres
96-09, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
- Ricardo A. Lagos, . "An Alternative Approach to Market Frictions: An Application to the Market for Taxicab Rides," Penn CARESS Working Papers 058589d20e3fbe4e559adb44b, Penn Economics Department.
- Smith, Bruce D, 1994. "Efficiency and Determinacy of Equilibrium under Inflation Targeting," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 327-44.
- Lawrence Blume & David Easley, 1993. "Rational Expectations and Rational Learning," Game Theory and Information 9307003, EconWPA.
- Lucas, Robert E, Jr, 1986. "Adaptive Behavior and Economic Theory," The Journal of Business, University of Chicago Press, vol. 59(4), pages S401-26, October.
When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:1148. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.