Continua of Underemployment Equilibria Reflecting Coordination Failures, Also at Walrasian Prices

A. Citanna, H. Crès, J. Drèze, P.J.J. Herings, A. Villanacci

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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.
Original languageEnglish
Pages (from-to)169-200
JournalJournal of Mathematical Economics
Volume36
Issue number3
DOIs
Publication statusPublished - 1 Jan 2001

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