Organizational Equilibrium with Capital / Marco Bassetto, Zhen Huo, José-Víctor Ríos-Rull.

Format:

Book

Author/Creator:

Bassetto, Marco.

Contributor:

National Bureau of Economic Research.

Huo, Zhen.

Ríos-Rull, José-Víctor.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25376.

NBER working paper series no. w25376

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

This paper proposes a new equilibrium concept - organizational equilibrium - for models with state variables that have a time-inconsistency problem. The key elements of this equilibrium concept are: (1) agents are allowed to ignore the history and restart the equilibrium; (2) agents can wait for future agents to start the equilibrium. We apply this equilibrium concept to a quasi-geometric discounting growth model and to a problem of optimal dynamic fiscal policy. We find that the allocation gradually transits from that implied by its Markov perfect equilibrium towards that implied by the solution under commitment, but stopping short of the Ramsey outcome. The feature that the time inconsistency problem is resolved slowly over time rationalizes the notion that good will is valuable but has to be built gradually.

Notes:

Print version record

December 2018.