Equilibrium Analysis in the Behavioral Neoclassical Growth Model

Abstract

Rich behavioral biases, mistakes and limits on rational decision-making are often thought to make equilibrium analysis much more intractable. We show that this is not the case in the context of the neoclassical growth model (potentially incorporating incomplete markets and distortions). We break down the response of the economy to a change in the environment or policy into two parts: a direct response at a given vector of prices, and an equilibrium response that plays out as prices change. We refer to a change as a "local positive shock" if the direct response, when averaged across households, increases aggregate savings. Our main result shows that under weak regularity conditions, regardless of the details of behavioral preferences, mistakes and constraints on decision-making, the long-run equilibrium will involve a greater capital-labor ratio if and only if we start with a local positive shock. One implication of this result is that, from a qualitative point of view, behavioral biases matter for long-run equilibrium if and only if they change the direction of the direct response. We show that these aggregate predictions are coupled with individual-level "indeterminacy": nothing much can be said about individual behavior.

Markov distributional equilibrium dynamics in games with complementarities and no aggregate risk

“…It bears mentioning that the assumptions in Acemoglu and Jensen (2015, 2018), and Light and Weintraub (2021) are not sufficient for an analogous monotone comparative dynamics result. The key difference between these works and ours is that, when studying comparative statics of a steady‐state equilibrium (or mean‐field equilibrium), one does not investigate dynamic complementarities between current actions and future distributions of types and actions in the population.…”

“…11 See also Acemoglu and Jensen (2015, 2018) for a discussion on the relation between large dynamic economies and large anonymous games. …”

Digital economy and new capitalism: Generation Z as consumer

“…In this paper, we present two very significant phenomena of digitalization: (1) whether data has become an equally important factor of production as capital, labor, and land, and (2) what changes occur in the cost structure with the emergence of digital goods? Bearing in mind that these changes have had a profound impact on both the supply and the demand side, in this paper, we have devoted special attention to the behavior of Generation Z and Generation Alpha as consumers compared to other generations.…”

Stranding Ahoy? Heterogeneous Transition Beliefs and Capital Investment Choices

“…Hence, today's assessment of the profit prospects of available technological options is a distribution, rather than a point value, with its shape depending on the strength of transition-related belief diversity. Heterogeneity in beliefs may make aggregate investment decisions uncoordinated, possibly contradictory, ultimately hampering the good course of the transition (Acemoglu and Jensen, 2018;Fais et al, 2016).…”

“…In what follows, we use the word 'beliefs' interchangeably with 'expectations' to insist on the idea that beliefs about the future are not model-consistent, followingAcemoglu and Jensen (2018).…”