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Selection of Boundedly Rational Firms and the Allocation of Resources


  • Saint-Paul, Gilles


I study how savers allocate funds between boundedly rational firms which follow simple pricing rules. Firms need cash to pay their inputs in advance, and savers-shareholders allocate cash between them so as to maximize their rate of return. When the rate of return on each firm is observed, there are multiple equilibria, and some degree of monopoly power is sustained. However, the economy gets close to the Walrasian equilibrium when the availability of funds goes to infinity. Multiple equilibria also arise when there are ‘entrants’ with unobservable rates of return. In an equilibrium where entrants are not funded, savers invest in incumbents because those entrants which will divert customers from incumbents are likely to be excess underpricers.
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  • Saint-Paul, Gilles, 2006. "Selection of Boundedly Rational Firms and the Allocation of Resources," IDEI Working Papers 417, Institut d'Économie Industrielle (IDEI), Toulouse.
  • Handle: RePEc:ide:wpaper:6259

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    References listed on IDEAS

    1. Roger Guesnerie, 2001. "Short-Run Expectational Coordination: Fixed Versus Flexible Wages," The Quarterly Journal of Economics, Oxford University Press, vol. 116(3), pages 1115-1147.
    2. Pierre-Emmanuel Ly, 2007. "The charitable activities of terrorist organizations," Public Choice, Springer, vol. 131(1), pages 177-195, April.
    3. B. Peter Rosendorff & Todd Sandler, 2004. "Too Much of a Good Thing?," Journal of Conflict Resolution, Peace Science Society (International), vol. 48(5), pages 657-671, October.
    4. Quan Li, 2005. "Does Democracy Promote or Reduce Transnational Terrorist Incidents?," Journal of Conflict Resolution, Peace Science Society (International), vol. 49(2), pages 278-297, April.
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    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • Z1 - Other Special Topics - - Cultural Economics


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