Stability of the Market Economy in the Presence of Diverse Economic Agents

Anjan Mukherji

No 8, Working Papers from JICA Research Institute

Abstract: The stability of market economy is defined and stability conditions deduced which do not appear to restrict preferences in any significant manner. This assumes importance when considering economies where diversity among agents is known to exist. It is shown that if a condition on the rank of the Jacobian matrix of the excess demand functions at equilibria is satisfied then equilibria will be locally asymptotically stable. When this condition is not met, it is shown how redistributing resources may lead to stable competitive equilibrium. It is also shown how instead of imposing credible penalties, which may cause significant incentive problems, redistributing resources may serve to provide the correct incentives to agents who otherwise might have contributed to market failure.

Keywords: Stability of equilibrium; diverse preferences; redistribution of resources; rank condition; incentives for competitive transactions (search for similar items in EconPapers)
Date: 2010-03-01
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