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Continua of Underemployment Equilibria

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  • Herings, P.J.J.

    (Tilburg University, School of Economics and Management)

  • Dreze, J.

Abstract

In this paper the existence of unemployment is partly explained as being the result of coordination failures. This is achieved by considering a standard general equilibrium model and splitting the set of commodities in two groups. The first group contains commodities like gold. The prices of these commodities are fully flexible, even in the short run, and their markets always clear. The prices of the commodities in the second group are rigid in the short run (for instance labour services or some consumer goods) and households and firms may expect restricted supply possibilities. Whe show that such expectations are selfenforcing, even if all prices of commodities in the second group are competitive. In that case it is shown that as a result of coordination failures a continuum of equilibria results, among which an equilibrium with approximately no trade inthe commodities of the second group, and a Walrasian equilibrium. In fact, these coordination failures also arise at other price systems, but then unemployment is the result of both a wrong price system and coordination failures. Moreover, some properties of the set of equilibria are analysed. 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 neighbourhood of a competitive allocation. Examples show that the latter property may not hold in general.
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Suggested Citation

  • Herings, P.J.J. & Dreze, J., 1998. "Continua of Underemployment Equilibria," Other publications TiSEM c82ec7ae-6be6-43a7-aa39-c, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:c82ec7ae-6be6-43a7-aa39-c2be056607c0
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    References listed on IDEAS

    as
    1. Alessandro Citanna & Herve Cres & Antonio Villancci, "undated". ""Underemployment of Resources and Self-Confirming Beliefs''," CARESS Working Papres 95-20, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
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    10. Herings, P.J.J., 1993. "On the connectedness of the set of constrained equilibria," Discussion Paper 1993-63, Tilburg University, Center for Economic Research.
    11. Laan, Gerard van der, 1982. "Simplicial approximation of unemployment equilibria," Journal of Mathematical Economics, Elsevier, vol. 9(1-2), pages 83-97, January.
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    15. Polterovich, V. M. & Spivak, V. A., 1983. "Gross substitutability of point-to-set correspondences," Journal of Mathematical Economics, Elsevier, vol. 11(2), pages 117-140, April.
    16. Herings, P Jean-Jacques, 1996. "Equilibrium Existence Results for Economies with Price Rigidities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(1), pages 63-80, January.
    17. Laroque, Guy & Polemarchakis, Heraklis, 1978. "On the structure of the set of fixed price equilibria," Journal of Mathematical Economics, Elsevier, vol. 5(1), pages 53-69, March.
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    Citations

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    Cited by:

    1. Jacques Drèze, 2001. "On the Macroeconomics of Uncertainty and Incomplete Markets," International Economic Association Series, in: Jacques Drèze (ed.), Advances in Macroeconomic Theory, chapter 3, pages 30-55, Palgrave Macmillan.
    2. Jacques H. Drèze, 2000. "Sur la macroéconomie de l'incertitude et des marchés incomplets," Revue de l'OFCE, Programme National Persée, vol. 72(1), pages 7-37.
    3. Herings, P.J.J. & van der Laan, G. & Talman, A.J.J., 1998. "Price-Quantity Adjustment in a Keynesian Economy," Discussion Paper 1998-118, Tilburg University, Center for Economic Research.
    4. 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," SciencePo Working papers Main hal-01064886, HAL.
    5. repec:hal:spmain:info:hdl:2441/10287 is not listed on IDEAS
    6. Citanna, A. & Cres, H. & Dreze, J. & Herings, P.J.J. & Villanacci, A., 2001. "Underemployment of resources and self-fulfilling beliefs: non-Walrasian allocations at Walrasian prices," Research Memorandum 041, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    7. DRÈZE, Jacques, 2001. "Indeterminateness of equilibria and macroeconomics," LIDAM Discussion Papers CORE 2001058, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. Sander van der Hoog, 2004. "Credit and Cash-in-Advance in Disequilibrium Models," Computing in Economics and Finance 2004 294, Society for Computational Economics.
    9. Alessandro Citanna & Herve Cres & Antonio Villanacci, "undated". "Underemployment of resources and self-fulfilling beliefs: Nonwalrasian allocations at walrasian prices," GSIA Working Papers 11, Carnegie Mellon University, Tepper School of Business.
    10. repec:spo:wpecon:info:hdl:2441/10287 is not listed on IDEAS
    11. Bruinshoofd, W.A. & Letterie, W.A., 2001. "Comovement of sales, retention practice and financing constraints in Dutch manufacturing," Research Memorandum 003, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    12. repec:hal:wpspec:info:hdl:2441/10287 is not listed on IDEAS

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    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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