A Pareto Inefficient Path to Steady State in Recession

Taiji Harashima

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, I focus on the concept of Nash equilibrium of a Pareto inefficient path (NEPIP) to examine the nature of the transition path to steady state after a shock that generates a severe recession. Risk-averse and non-cooperative households strategically and rationally choose a NEPIP if a shock that widely shifts the steady state downwards occurs. Because NEPIPs are not Pareto efficient, an infinite number of transition paths can be NEPIPs, but a unique NEPIP is eventually selected from among many possible NEPIPs by households through a tug of war between their preference to avoid a worst-case scenario and the expected utility.

Keywords: Great Depression; Great Recession; Pareto inefficiency; Recession; Transition path (search for similar items in EconPapers)
JEL-codes: D10 E21 E32 (search for similar items in EconPapers)
Date: 2019-04-10
New Economics Papers: this item is included in nep-mac, nep-ore and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:93216

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