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Sunspot Equilibria in a Production Economy: Do Rational Animal Spirits Cause Overproduction?

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  • Atsushi Kajii

    (Institute of Economic Research, Kyoto University)

Abstract

We study a standard two period economy with one nominal bond and one firm. The input of the firm is done in the first period and financed with the nominal bond, and its profits are distributed to the shareholders in the second period. We show that a sunspot equilibrium exists around each efficient equilibrium. The interest rate is lower than optimal and there is over production in sunspot equilibria, under some conditions. But a sunspot equilibrium does not exist if the profit share can be traded as well as the bond.

Suggested Citation

  • Atsushi Kajii, 2008. "Sunspot Equilibria in a Production Economy: Do Rational Animal Spirits Cause Overproduction?," KIER Working Papers 655, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:655
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    References listed on IDEAS

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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.
    3. Atsushi Kajii & Antonio Villanacci & Alessandro Citanna, 1998. "Constrained suboptimality in incomplete markets: a general approach and two applications," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(3), pages 495-521.
    4. Atsushi Kajii, 2007. "Welfare Gains And Losses In Sunspot Equilibria," The Japanese Economic Review, Japanese Economic Association, vol. 58(3), pages 329-344, September.
    5. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
    6. Goenka, Aditya & Prechac, Christophe, 2006. "Stabilizing sunspots," Journal of Mathematical Economics, Elsevier, vol. 42(4-5), pages 544-555, August.
    7. Atsushi Kajii, 1997. "On the Role of Options in Sunspot Equilibria," Econometrica, Econometric Society, vol. 65(4), pages 977-986, July.
    8. 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.
    9. Piero Gottardi & Atsushi Kajii, 1999. "The Structure of Sunspot Equilibria: The Role of Multiplicity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(3), pages 713-732.
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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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