An economic model with suboptimizing agents

Abstract

An aggregative economic model with suboptimizing agents is considered. The ideas of decentralization and price aggregation (as defined in Utility Theory) are applied. The existence of short-term equilibrium is proved relying on closed graph arguments.

Keywords:

• Decision Theory
• Separability
• Bounded rationality
• Short-term equilibrium
• Aggregative models
• Closed graph theorems

Keywords:

• Mathematics Subject Classifications 2000: 91B06
• 91B52
• 54CO5

Acknowledgements

The preparation of this work began when the author was a guest in CERMSEM of the University of Paris I, whose hospitality is thanked. Financial support by the Spanish Ministry of Education and Science (ESF European project acción especial SEC2002-10181-E) is gratefully acknowledged.

Notes

1 Caeteris enim paribus, quo maior est pecuniae copia in aliquo loco, eo minus in eo valet ad res emendas, et ad comparanda caetera, quae pecunia non sunt. Quemadmodum enim abundantia mercium facit eas decrescere in pretio, existente aequali pecuniae ac mercatorum copia: sic etiam pecuniae abundantia facit merces accrescere in pretio, existente eadem mercium ac mercatorum copia, atque adeo in causa est, ut pecunia ipsa in se vilescat, ad res eas emendas et comparandas''. The emphasis is ours, matching in the Latin original and the English translation (by 4) above. On Molina and “caeteris paribus”, v. 6.

2 “It is the rule that the bank turns away a customer whom it considers deserving of credit only if it is compelled to do so” (12, III.5).

3 “[The fundamental characteristics of modern industrial life] are, as we shall presently see, a certain independence and habit of choosing one's own course for oneself, a self-reliance; a deliberation and yet a promptness of choice and judgement, and a habit of forecasting the future and of shaping one's course with reference to distant aims'' (7, I.I.4).

4 Recall that in this model the (only) bank cannot buy bonds. In practice, MFIs other than the central bank are potential arbitrageurs.

5 Indeed a more accurate version of (A.5) would be: (A.5′) There exists ϵ >0 such that for all Q>0,P>0. Since ϵ  is to be very small, we instead assume (A.5) for the sake of simplicity.

6 In the real world, both banks and consumers are interested in avoiding bankruptcies, and in fact bankruptcies are the exception as the result of the actual conduct of both parties.

7 This is a portfolio decision where the attitude towards risk of the consumer and the dispersion of the distribution of exert obviously their influence.

8 Fixed capital formation and the level of employment are issues to be best tackled together.