Underemployment of Resources and Self-fulfilling Beliefs: Non-Walrasian Allocations at Walrasian Prices

Alessandro Citanna, Herve Cres, Jacques H. Dreze, P. Jean-Jacques Herings () and Antonio Villanacci ()

No 3, Research Memoranda from Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization

Abstract: In this paper the existence of unemployment is partly explained as being the result of coordination failures. It is shown that as a result of self-fulfilling pessimistic expectations, even at Walrasian prices, a continuum of equilibria results, among which an equilibrium with approximately no trade and a Walrasian equilibrium. These coordination failures also arise at other price systems, but then unemployment is the result of both a wrong price system and coordination failures. Some properties of the set of equilibria are analyzed. 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 neighborhood of a competitive allocation, when prices are Walrasian. For a specialized economy, a dynamic illustration is offered.

Keywords: mathematical economics and econometrics (search for similar items in EconPapers)
Date: 2001
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Working Paper: Underemployment of resources and self-fulfilling beliefs: Nonwalrasian allocations at walrasian prices
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