Testing Creative Destruction in an Opening Economy: the Case of the South African Manufacturing Industries
Johannes Fedderke (),
Peter Howitt (),
Chandana Kularatne and
Nicola Viegi ()
No 93, Working Papers from Economic Research Southern Africa
We study a Lucas (1978) "fruit-tree" economy under the assumption that agents are Choquet expected utility (CEU) rather than standard expected utility (EU) decision makers. The agentsâ€™ non-additive beliefs about the economyâ€™s stochastic dividend payment process may thus express ambiguity attitudes and accommodate violations of Savageâ€™s sure-thing principle as elicited by Ellsberg (1961). As our main formal result we establish the existence of a unique stationary equilibrium price function for the assets in this economy. In order to account for the dynamic inconsistency of CEU decision makers, we thereby use an equilibrium concept that combines the market clearing condition of general equilibrium theory with Bayesian Nash equilibrium. A simple example about the equity premium in our economy with non-additive beliefs illustrates our formal findings.
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Working Paper: Testing Creative Destruction in an Opening Economy: the Case of the South African Manufacturing Inudstries (2008)
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