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Organizational Equilibrium with Capital

Author

Listed:
  • Marco Bassetto
  • Zhen Huo
  • Jose-Victor Rios-Rull

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

  • Marco Bassetto & Zhen Huo & Jose-Victor Rios-Rull, 2018. "Organizational Equilibrium with Capital," Working Paper Series WP-2018-20, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-2018-20
    DOI: 10.21033/wp-2018-20
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Organizational Equilibrium with Capital
      by Christian Zimmermann in NEP-DGE blog on 2018-12-24 16:52:26

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    More about this item

    Keywords

    Capital; fiscal policy; Markov equilibrium; Quasi-geometry;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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