A Pareto Inefficient Path to Steady State in Recession

Harashima, Taiji (2019): A Pareto Inefficient Path to Steady State in Recession.

Abstract

In this paper, I focus on the concept of Nash equilibrium of a Pareto inefficient path (NEPIP) to examine the nature of the transition path to steady state after a shock that generates a severe recession. Risk-averse and non-cooperative households strategically and rationally choose a NEPIP if a shock that widely shifts the steady state downwards occurs. Because NEPIPs are not Pareto efficient, an infinite number of transition paths can be NEPIPs, but a unique NEPIP is eventually selected from among many possible NEPIPs by households through a tug of war between their preference to avoid a worst-case scenario and the expected utility.

• Item Type: MPRA Paper
• Language: English
• Keywords: Great Depression; Great Recession; Pareto inefficiency; Recession; Transition path
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D10 - General; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles

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