Costas Azariadis

Threshold Externalities in Economic Development

Standard one-sector growth models often have the counterfactual implication that economies with access to similar technologies will converge to a common balanced growth path. We propose an elaboration of the Diamond model that permits multiple, locally stable stationary states. This multiplicity is due to increasing social returns to scale in the accumulation of human capital.

Implicit Contracts and Underemployment Equilibria

This paper studies an industry with demand uncertainty which prompts risk-neutral firms to act both as employers and as insurers of homogeneous, risk-averse laborers. The resulting contractual arrangements turn out, in their simplest form, to be more likely to specify full employment the more of the following conditions prevail: small variability in product price, above-average economy-wide labor demand, highly risk-averse workers, small unemployment compensation, and highly competitive product market. Otherwise, it may be optimal for firms to lay off, by random choice, part of the work force during low states of demand.

Self-fulfilling prophecies

After a quarter century of unbroken development in the theory of allocation under uncertainty, it has become an obvious fact that randomness in endowments, preferences or technology will generally work its way to the prices and allocations which prevail in equilibrium. Is it true, as intuition may suggest in haste, that random prices necessarily reflect some intrinsic uncertainty in the structure of the economy, or can they arise, as some recent literature [3, 12, 14, 151 indicates, merely from extraneous, self-perpetuating beliefs that prices are stochastic? The question is of interest for it raises the possibility that business cycles are set in motion by arbitrary shifts in any factor, however purely subjective, agents happen to deem relevant to economic activity: animal spirits, consumer sentiment or the prophecies of the Sibyl at Cumae may spark fluctuations in which prices change simply because they are expected to and price signals convey no structural information. The evidence on the influence of subjective factors is ample and dates back several centuries’; the Dutch “tulip mania,” the South Sea bubble in England, and the collapse of the Mississippi Company in France are three well-documented cases of speculative price movements which historians consider unwarranted by “objective” conditions. What follows is a demonstration that a kindred type of paradoxical behavior, which we name extraneous uncertainty, is both possible and “frequent” among rational expectations equilibria in an aggregative model of overlapping generations. In particular, if we constrain (the probability distribution of) the price level to clear markets, reproduce beliefs and, in

Sunspots and Cycles

Because sunspot equilibria seem to be of central importance for an understanding of rational expectations, we seek here to characterize completely a limited class of sunspot equilibria (stationary ones with two possible natural events) in the simplest overlapping generations model of production. We present a sufficient condition for the existence of stationary sunspot equilibria, examine how these are related to strictly periodic equilibria of the same order, and investigate how deterministic stationary equilibria bifurcate to stationary sunspot equilibria. A concluding section examines how our results survive in more general settings.

The Economics of Poverty Traps Part One: Complete Markets

This paper lists theoretical reasons why neoclassical models of one-sector growth imply that nations with identical economic structures need not converge to the same steady state or balanced growth path, and outlines the empirical significance and policy implications of conditional nonconvergence. We survey poverty traps in both convex and nonconvex economies with complete market structures. Among the potential causes of traps are subsistence consumption; distorted international trade in intermediate inputs; demographic transitions when fertility is endogenous; technological complementarities in the production of consumption goods, financial intermediation services, manufactures, or human capital; coordination failures among voters; various restrictions on borrowing; indivisibilities in human capital formation or child rearing; and monopolistic competition in product or factor markets.

Private Information, Money, and Growth: Indeterminacy, Fluctuations, and the Mundell-Tobin Effect

We introduce an informational asymmetry into an otherwise standard monetary growth model and examine its implications for the determinacy of equilibrium, for endogenous economic volatility, and for the relationship between steady-state output and the rate of money growth. Some empirical evidence suggests that, for economies with low initial inflation rates, permanent increases in the money growth rate raise long-run output levels. This relationship is reversed for economies with high initial inflation rates. Our model predicts this pattern. Moreover, in economies with high enough rates of inflation, credit rationing emerges, monetary equilibria become indeterminate, and endogenous economic volatility arises.

Employment With Asymmetric Information

In an economy without informational and other distortions, entrepreneurs and workers can write labor contracts that support a Pareto optimal allocation of resources. This paper is an attempt to characterize contracts when enterpreneurs are better informed about the state of nature than are their workers. Asymmetric information generally results in a suboptimal allocation of both risk and worker effort; in particular, if consumption and leisure are perfect substitutes, employment will be less than fully Pareto optimal in all but the most favorable states of nature.

Chapter 5 Poverty Traps

Abstract This survey reviews models of self-reinforcing mechanisms that cause poverty to persist. Some of them examine market failure in environments where the neoclassical assumptions on markets and technology break down. Other mechanisms include institutional failure which can, by itself, perpetuate self-reinforcing poverty. A common thread in all these mechanisms is their adverse impact on the acquisition of physical or human capital, and on the adoption of modern technology. The survey also reviews recent progress in the empirical poverty trap literature.

Endogenous Debt Constraints in Lifecycle Economies

We characterize competitive equilibria with perfect foresight in a deterministic, three-period pure-exchange overlapping generations economy with perfect information and no commitment to loan contracts. Commitment is replaced by an enforcement mechanism that excludes defaulters from asset markets for one period. For hump-shaped endowment profiles, young individuals face endogenous debt constraints that ration current consumption. Changes in current and future yields affect these constraints, inducing an additional income effect on rationed household demand that makes current and future consumption complements. This mechanism can lead to multiple steady states, persistent indeterminacy and regime switching. We show that sensitivity to shocks and complex dynamic behaviour are consistent with endogenous debt limits but not with exogenous liquidity constraints. Copyright 2003, Wiley-Blackwell.

Trend-reverting fluctuations in the life-cycle model

Aggregate time series provide evidence of short term dynamic adjustment that appears to be governed by complex or negative real eigenvalues. This finding is at odds with the predictions of reasonably parameterized, convex one-sector growth models with complete markets. We study life cycle economies in which aggregate saving depends non-trivially on the distribution of wealth among cohorts. If consumption goods are weak gross substitutes near the steady state price vector, we prove that the unique equilibrium of a life cycle exchange economy converges to the unique non-monetary steady state via damped oscillations. We also discuss examples and extensions. ; Earlier title: Complex Eigenvalues and Trend-Reverting Fluctuations