Synchronizing Markets, Mutual Information and the Price Level: Coordination in a Non-General Equilibrium World

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.: Department of Economics and Institute for Mathematical Behavioral Sciences, UCI.

Working Papers from University of California at Los Angeles, Center for Computable Economics

Abstract: In his paper ``Information costs and the division of labor,'' Axel Leijonhufvud describes a system of production in which firms show increasing returns and every firm uses inputs that are produced by other firms in the system. Such a system of interrelated firms will show increasing returns if they overcome the coordination failures to which the system is prone. Coordination failures are failures of timing and synchronization. They are brought on when specialized assets become the subject of opportunistic hold-ups. A hold-up of just one input or output can cascade through the system, leaving many firms without an essential input, who are unable to supply their outputs to other firms, who then fail to deliver to still others... Coordination failures produce highly complex dynamics that include recessions, bubbles, liquidity constraints, sluggish prices, and excess demand or supply. They break down the mutual information in prices so that the prices of different commodities or assets contain different information, some stale, some fresh, some reflecting liquidity constraints, and others reflecting unanticipated states of the world

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