10 - Equilibrium without an auctioneer

Summary

The development of the microfoundation of macroeconomics has been slow going; very interesting, but slow going. I want to begin with an elaboration of why this subject is hard (for me). I will then discuss two lines of research that explore what happens when economies are modeled without a Walrasian auctioneer - search theory (Section 1) and the theory of bank runs (Section 2). Of course, this is only a piece of the literature that identifies itself as the microfoundations of macroeconomics. I will concentrate on the flavor of results, rather than on the technical problems of constructing tractable macro-oriented models within the micro rules of model construction.

Microanalysis

The fundamental theorem of welfare economics makes possible straightforward use of the competitive general equilibrium model for the analysis of distortions in the economy. Because the economy would be Pareto optimal otherwise, it is easy to see the welfare implications of altering one of the assumptions of the Arrow-Debreu model. Observing pollution, one changes the assumption that production decisions do not affect individual utilities directly. One can then analyze the utility implications of pollution (compared with a different production technology or a different production decision), calculate socially optimal production decisions (for different criteria and different accompanying income redistribution tools), and design price and tax policies to improve or optimize resource allocation. A parallel literature analyzes congestion.