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Underemployment of Resources and Self-Fulfilling Beliefs: Nonwalrasian Allocations at Walrasian Prices

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  • Alessandro Citanna

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Hervé Crès

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Jacques H Drèze

    (CORE - Center of Operation Research and Econometrics [Louvain] - UCL - Université Catholique de Louvain = Catholic University of Louvain)

  • P. Jean-Jacques Herings

    (CORE - Center of Operation Research and Econometrics [Louvain] - UCL - Université Catholique de Louvain = Catholic University of Louvain)

  • Antonio Villanacci

    (UniFI - Università degli Studi di Firenze = University of Florence)

Abstract

In this paper the existence of unemployment is partly explained as being the result of coordination failures. It is shown that as a result of self-fulfilling pessimistic expectations, even at Walrasian prices, a continuum of equilibria results, among which an equilibrium with approximately no trade and a Walrasian equilibrium. These coordination failures also arise at other price systems, but then unemployment is the result of both a wrong price system and coordination failures. Some properties of the set of equilibria are analyzed. 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 neighborhood of a competitive allocation, when prices are Walrasian. For a specialized economy, a dynamic illustration is offered.

Suggested Citation

  • 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.
  • Handle: RePEc:hal:wpaper:hal-01064886
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-01064886
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    References listed on IDEAS

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    Cited by:

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    2. Hoog, S. van der, 2004. "On the Micro-Dynamics of a Cash-in-Advance Economy," CeNDEF Working Papers 04-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.

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