Negishi-Solow Efficiency Wages, Unemployment Insurance and Dynamic Deterministic Indeterminacy

This paper introduces efficiency wages designed to provide workers with incentives to make appropriate effort levels, and involuntary unemployment, along the pioneering lines of Negishi (1979), Solow (1979), Shapiro and Stiglitz (1984), in a dynamic model involving heterogeneous agents and financial constraints as in Woodford (1986) and Grandmont, Pintus and de Vilder (GPV, 1998). Effort varies continuously while there is unemployment insurance funded out of taxation of labour incomes. Increasing unemployment insurance is beneficial to employment along the deterministic stationary state, and can even in some cases lead to a Pareto welfare improvement for all agents, through general equilibrium effects, by generating higher individual real labour incomes, hence larger consumptions of employed and unemployed workers, and thus a higher production. On the other hand, the local (in)determinacy properties of the stationary state are opposite to those obtained in the competitive specification of the model (GPV, 1998) : local determinacy (indeterminacy) occurs for elasticities of capitalefficient labour substitution lower (larger) than a quite small bound. Increasing unemployment insurance is more likely to lead to local indeterminacy and thus to generate dynamic inefficiencies due to the corresponding expectations coordination failures.Efficiency wages, involuntary unemployment, unemployment insurance, effort incentives, local indeterminacy, capital-labour substitution, local bifurcations.

Expectations Driven Nonlinear Business Cycles

The first part of the paper is a brief introduction to the concepts and methods used in recent endogenous business cycles models. Endogenous deterministic and stochastic fluctuations are bound to occur, under increasingly plausible assumptions, in models with individual optimization, market clearing and self-fulfilling expectations when there are capital market imperfections. The phenomenon is most likely to be observed, in a nonlinear framework, when some eigenvalue(s) of the system have a modulus close to 1 (unit roots). It is argued that endogenous business cycles models have become more and more credible alternatives to describe observed fluctuations in our economies. The second part of the paper reviews recent studies suggesting that self-fulfilling expectations are often dynamically unstable when learning is taken into account. The phenomenon is most likely to occur when expectations matter significantly, which might explain why actual economic time series display higher volatilities in markets for capital investment, inventories, durable goods, financial assets and stocks. It is suggested that on account of the important nonlinearities involved in learning, actual learning dynamics may generate highly complex, even chaotic, trajectories

Transformations of the Commodity Space, Behavioral Heterogeneity and the Aggregation Problem

The aggregation problem in demand analysis and exchange equilibrium is studied by putting restrictions on the shape of the distribution of the agents’ characteristics. This is done by exploiting the finite dimensional linear structure induced on demand functions by affine transformations of the commodity space (or household equivalence scales). Increasing the degree of behavioral heterogeneity in the household sector or more specifically, making the conditional distributions in each equivalence class of demand functions fiat enough, has an important regularizing influence on aggregate budget shares: market demand has a negative dominant diagonal Jacobian matrix, aggregate excess demand has the gross substitutability property, on a large set of prices. These facts have strong consequences for the unicity and stability of equilibrium as well as for the prevalence of the weak axiom of revealed preference in the aggregate in a private ownership Walrasian exchange model

Behavioral Heterogeneity and Cournot Oligopoly Equilibrium

It is not infrequent to see studies of imperfect competition or of industrial organization rest upon questionable foundations such as the hypothesis that inverse market demand is, whenever it is positive, concave or even linear. Assumptions of this sort are not robust (i.e., "additive") in the sense that they are not usually preserved through aggregation of different sectors that would satisfy them individually. The present paper investigates an alternative specification that is based upon the plausible existence of significant heterogeneities among demanders. It is demonstrated that specific forms of demand heterogeneity tend to stabilize market expenditures. In a partial equilibrium context, sufficient demand heterogeneity is shown to imply existence and unicity of a Cournot oligopoly equilibrium.Aggregation, heterogeneity, equivalence scales, oligopoly equilibrium

Nonlinear Difference Equations, Bifurcations and Chaos: An Introduction

The aim of these lecture notes is to present a few mathematical facts about the bifurcations of nonlinear difference equations, in a concise and simple form that might be useable by economic theorists.Nonlinear dynamics, Bifurcations, Chaos, Business cycles

Transformations of the Commodity Space, Behavioral Heterogeneity and the Aggregation Problem

The aggregation problem in demand analysis and exchange equilibrium is studied by putting restrictions on the shape of the distribution of the agents' characteristics. This is done by exploiting the finite dimensional linear structure induced on demand functions by affine transformations of the commodity space (or household equivalence scales). Increasing the degree of behavioral heterogeneity in the household sector or more specifically, making the conditional distributions in each equivalence class of demand functions fiat enough, has an important regularizing influence on aggregate budget shares: market demand has a negative dominant diagonal Jacobian matrix, aggregate excess demand has the gross substitutability property, on a large set of prices. These facts have strong consequences for the unicity and stability of equilibrium as well as for the prevalence of the weak axiom of revealed preference in the aggregate in a private ownership Walrasian exchange model.Aggregation, demand functions, revealed preferences

Théorie de l'équilibre temporaire général

Temporary general equilibrium theory This paper surveys some recent studies of economics where trading takes place sequentially over time, and where each agent makes decisions af every moment in the light of his expectations about his future environnent. The paper reviews particularly the issues raised by speculation in capital markets, and by the consideration of money and banking activities in temporary competitive equitibrium models, where adjustments take place by means of price movements only. A thorough investigation of the logic of temporary equilibrium models with quantity rationing is also offered.Cet ouvrage fait le point des recherches théoriques récentes sur des économies où l'échange a lieu séquentiellement au cours du temps et où chaque agent prend à chaque instant des décisions au vu de ses anticipations concernant son envi­ronnement futur. L'accent est porté particulièrement sur les problèmes soulevés par la spéculation sur les marchés à terme (marchés des capitaux), ainsi que par la prise en compte de la monnaie et des activités bancaires dans les modèles d'équilibre temporaire concurrentiel, où les ajustements se font uniquement par les prix. Une analyse de la logique des modèles d'équilibre temporaire avec rationnement quantitatif est également présentée.Grandmont Jean-Michel. Théorie de l'équilibre temporaire général. In: Revue économique, volume 27, n°5, 1976. pp. 805-843

Local bifurcations and stationary sunspots

Digitised version produced by the EUI Library and made available online in 2020

Temporary Equilibrium : Money, Expectations and Dynamics

It is attempted in this review to present in accessible terms moden developments in the theory of temporary equilibrium and of economic dynamics initiated by the publication of Value and Capital. Attention is focussed on 1) the integration of money and financial assets in general equilibrium macroeconomic models and of their links with the theory of imperfect competition; 2) the occurrence and multiplicity of long run steady states, with self-fulfilling expectations, of the economic or social system (stationary states, deterministc cycles, stationary stochastic processes), and 3) the stability, or unstability, of these long run steady states when traders employ pre-specified learning processes.Published in connection with a visit at the IIES