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Sunspot Equilibria In A Production Economy: Do Rational Animal Spirits Cause Overproduction?

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  • ATSUSHI KAJII

Abstract

We study a standard two‐period economy with one nominal bond and one firm. The firm finances the input with the nominal bond in the first period and its profits are distributed to the shareholders in the second period. We show that in the neighbourhood of each efficient equilibrium, a sunspot equilibrium also exists. It is shown that the equilibrium interest rate is lower than the efficient level and that there is overproduction in the sunspot equilibrium, under some conditions. However, there is no sunspot equilibrium if the profit share of the firm can be traded as well as the bond.

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  • Atsushi Kajii, 2009. "Sunspot Equilibria In A Production Economy: Do Rational Animal Spirits Cause Overproduction?," The Japanese Economic Review, Japanese Economic Association, vol. 60(1), pages 35-54, March.
    • Handle: RePEc:bla:jecrev:v:60:y:2009:i:1:p:35-54
    DOI: 10.1111/j.1468-5876.2008.00469.x
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    1. Mas-Colell,Andreu, 1990. "The Theory of General Economic Equilibrium," Cambridge Books, Cambridge University Press, number 9780521388702, September.
    2. Cass, David, 1992. "The Structure of Sunspot Equilibria in the Presence of Incomplete Financial Markets: Introduction," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 2(3), pages 307-308, July.
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    7. David Cass, 1989. "Sunspots and Incomplete Financial Markets: The Leading Example," Palgrave Macmillan Books, in: George R. Feiwel (ed.), The Economics of Imperfect Competition and Employment, chapter 25, pages 677-693, Palgrave Macmillan.
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    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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