Depression as a Nash Equilibrium Consisting of Strategies of Choosing a Pareto Inefficient Transition Path

MPRA Paper from University Library of Munich, Germany

Abstract: This paper shows that a Nash equilibrium consisting of strategies of choosing a Pareto inefficient transition path is selected by households even without frictions as a result of the revealed government failure in supervision of financial markets. The Pareto inefficiency causes the generation of many of the phenomena observed in a depression (e.g., a persistently large amount of unutilized resources), and it is not necessary to use “animal spirits” to explain the generation of a depression. The revealed government failure in the supervision of financial markets and the resulting increased policy-induced uncertainty makes non-cooperative and risk-averse households behave more myopically, resulting in a Nash equilibrium of a Pareto inefficient path. When the failure of financial supervision is revealed, the household rate of time preference shifts upwards when the expected variance of steady-state consumption increases and/or its expected value shifts downwards.

Keywords: Depression; Pareto efficiency; Nash equilibrium; Time preference; Financial supervision (search for similar items in EconPapers)
JEL-codes: D50 D91 E21 E24 E32 G28 (search for similar items in EconPapers)
Date: 2009-12-01
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Citations: View citations in EconPapers (12)

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https://mpra.ub.uni-muenchen.de/18987/1/MPRA_paper_18987.pdf revised version (application/pdf)

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