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

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  • Harashima, Taiji
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.

Suggested Citation

  • Harashima, Taiji, 2009. "Depression as a Nash Equilibrium Consisting of Strategies of Choosing a Pareto Inefficient Transition Path," MPRA Paper 18953, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:18953
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Harashima, Taiji, 2017. "Should a Government Fiscally Intervene in a Recession and, If So, How?," MPRA Paper 78053, University Library of Munich, Germany.
    2. Harashima, Taiji, 2016. "The Impending Long March of the Chinese Economy," MPRA Paper 73275, University Library of Munich, Germany.
    3. Harashima, Taiji, 2020. "A Theory of the Credit-to-GDP Gap: Using Credit Gaps to Predict Financial Crises," MPRA Paper 111732, University Library of Munich, Germany.
    4. Harashima, Taiji, 2020. "A Mechanism of Recession that Accompanies Persistent Pareto Inefficiency," MPRA Paper 98468, University Library of Munich, Germany.
    5. Harashima, Taiji, 2022. "A Household’s Preferences Vary Depending on Whether Incomes Are Permanent or Temporary: A Solution to the Time-Inconsistency Problem and Equity-Premium Puzzle," MPRA Paper 114762, University Library of Munich, Germany.
    6. Harashima, Taiji, 2019. "A Pareto Inefficient Path to Steady State in Recession," MPRA Paper 93216, University Library of Munich, Germany.
    7. Harashima, Taiji, 2024. "Macroeconomics Is Still Useful and Necessary: A Mechanism to Explain the Condition when Strict Convexity is Unsatisfied," MPRA Paper 121168, University Library of Munich, Germany.
    8. Harashima, Taiji, 2010. "Sustainable Heterogeneity: Inequality, Growth, and Social Welfare in a Heterogeneous Population," MPRA Paper 22521, University Library of Munich, Germany.
    9. Harashima, Taiji, 2024. "Numerical Simulation of Economic Depression," MPRA Paper 120508, University Library of Munich, Germany.
    10. Harashima, Taiji, 2018. "Do Households Actually Generate Rational Expectations? “Invisible Hand” for Steady State," MPRA Paper 88822, University Library of Munich, Germany.
    11. Harashima, Taiji, 2011. "A Mechanism of Cyclical Volatility in the Vacancy-Unemployment Ratio: What Is the Source of Rigidity?," MPRA Paper 32476, University Library of Munich, Germany.
    12. Harashima, Taiji, 2018. "Why Are Inflation and Real Interest Rates So Low? A Mechanism of Low and Floating Real Interest and Inflation Rates," MPRA Paper 84311, University Library of Munich, Germany.

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    More about this item

    Keywords

    Depression; Pareto efficiency; Nash equilibrium; Time preference; Financial supervision;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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