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Multiple Equilibria, Equilibrium Selection and Economic Policy
Journal of Contextual Economics – Schmollers Jahrbuch, Vol. 119 (1999), Iss. 2 : pp. 191–204
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Grosser, Joachim
Abstract
Within a simple model the effects of economic policy in the presence of multiple equilibria are analyzed. Expectations concerning equilibrium selection are assumed to be formed according to the risk-dominance criterion. A distinction is made between allocation effects (continuous shifts of equilibria) and coordination effects (discontinuous jumps between coexisting equilibria). We show that economic policy in the presence of multiple equilibria has effects which differ fundamentally from those to be expected within a single-equilibrium framework. From this we draw some conclusions on how the multiplicity of equilibria has to be taken into account when designing economic policy.