Factor Prices in General Equilibrium

Abstract

In general equilibrium models with linear or nonlinear activities, factor prices can be indeterminate and agents will have an incentive to non-competitively manipulate prices even if they are small relative to the market. The indeterminacy cannot occur at generic endowments, but the non-generic endowments where it does occur will arise endogenously as an equilibrium outcome when some factors, such as capital goods, are produced. This endogenous indeterminacy creates a hold-up problem since investors need not earn the rate of return that obtains in an intertemporal competitive equilibrium. Unlike the classical hold-up problem, factor-price indeterminacy is not attributable to there being few agents or bilateral monopoly.