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Article
Equilibrium and Government Commitment
Journal of Economic Theory (2005)
  • Marco Bassetto, Federal Reserve Bank of Chicago
Abstract

How should a government use the power to commit to ensure a desirable equilibrium outcome? In this paper, I show a misleading aspect of what has become a standard approach to this question, and I propose an alternative. I show that the complete description of an optimal (indeed, of any) policy scheme requires outlining the consequences of paths that are often neglected. The specification of policy along those paths is crucial in determining which schemes implement a unique equilibrium and which ones leave room for multiple equilibria that depend on the expectations of the private sector.

A slightly older version is available as Federal Reserve Bank of Minneapolis Working Paper #624, September 2002

Disciplines
Publication Date
September, 2005
Citation Information
Marco Bassetto. "Equilibrium and Government Commitment" Journal of Economic Theory Vol. 124 Iss. 1 (2005)
Available at: http://works.bepress.com/bassetto/8/