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Continua of Underemployment Equilibria
Herings,P.J.J. Dreze,J.
Herings,P.J.J.
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 equilibriummodel 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. We show that such expectations are self-enforcing, 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 in the 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.
Description
Pagination: 32
Date
1998
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Publisher
Microeconomics
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Keywords
General Equilibrium, Underemployment, Coordination Failures, Indeterminacy, C62 - Existence and Stability Conditions of Equilibrium, D51 - Exchange and Production Economies
Citation
Herings, P J J & Dreze, J 1998 'Continua of Underemployment Equilibria' CentER Discussion Paper, vol. 1998-05, Microeconomics, Tilburg.