Uncertainty and Endogenous Selection of Economic Equilibria

Vulkan NirScaramozzino Pasquale
CEIS Research Paper
This paper presents a model of co-ordination failures based on market power and local oligopoly. The economy exhibits a multiplicity of Pareto-ranked equilibria. The introduction of uncertainty generates an endogenous equilibrium selection process, due to a strategic use of information by firms. The economy is more likely to settle on some equilibria than on others. We argue that a full understanding of these robustness criteria is needed before any policy which is intended to help co-ordinate the level of activity to a Pareto dominant outcome can be successfully implemented.
Number: 5
Keywords: Microfoundations, co-ordination failure, equilibrium selection
JEL codes: C7, E00
Date: Tuesday 24 June 2003
Revision Date: Tuesday 24 June 2003