Continua of Underemployment Equilibria Reflecting Coordination Failures, Also at Walrasian Prices

H. CRES, A. CITANNA, A. Villanacci, J. Drèze, J. Herings, H. Crès

Journal of Mathematical Economics

2001, n°36, pp.169-200

Départements : Finance, Economie et Sciences de la décision

Mots clés : General equilibrium, Underemployment, Coordination failures, Indeterminacy

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