Classical general equilibrium model

Abstract: This paper looks at the broader implications of labor market related reforms beyond the conventional partial equilibrium response, which typically deals with the employment effects in the formal sector. In recent times, this is an important issue for India where such reforms are being seriously contemplated. The issue is important in view of the fact that in the post independence India there has not been much movement of people from rural economic activities to the organized urban sector. It is also well known by now that the rural non-farm sector and unorganized manufacturing and services absorb most of our relatively unskilled workforce. Hence, the general equilibrium impact of the labor market reform can hardly be undermined. We analyze the impact of such policies on overall industrial and rural employment for an open economy with a large informal sector. We deploy a standard neo classical general equilibrium model to characterize the economy and argue that such reforms, in general, would increase employment in the formal sector and cut back the size of the urban informal sector, but at the cost of falling informal wage and an increase in the same for the rural informal sector. This will mean a decline in the average wage unless there is a substantial increase in the size of the urban organized sector. If not, this might cause reverse migration to a segment of the economy where per capita production is already very low. If eventually such reforms give rise to an incentive to accumulate capital, the prospect for higher income may continue to be bleak. Investment in education and skill formation is a possible way out.

Abstract: Canonical analysis of the classical general equilibrium model demonstrates the existence of an open and dense subset of standard economies that possess fully-revealing rational expectations equilibria. This paper shows that the analogous result is not true in urban economies. An open subset of economies where none of the rational expectations equilibria fully reveal private information is found. There are two important pieces. First, there can be information about a location known by a consumer who does not live in that location in equilibrium, and thus the equilibrium rent does not reflect this information. Second, if a consumer’s utility depends only on information about their (endogenous) location of residence, perturbations of utility naturally do not incorporate information about other locations conditional on their location of residence. Existence of a rational expectations equilibrium is proved. Space can prevent housing prices from transmitting information from informed to uninformed households, resulting in an inefficient outcome.

Abstract: Social demand functions result from the budget constrained maximization of “social preferences” or “other regarding preferences.” These preferences are non-selfish in the sense that they also depend on other consumers’ wealth. This paper addresses the robustness to wealth externalities of the classical general equilibrium model with finite numbers of goods and consumers. The existence of equilibrium, the genericity of regular economies and, at those regular economies, the finite odd number of equilibria and the local continuity of equilibrium selection maps, and finally the identification (or dieomorphism) of the equilibrium manifold with a Euclidean space are shown to be satisfied independently of the size of those wealth externalities provided total resources are variable.