The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Underemployment Equilibria

  • P. Jean-Jacques Herings
Reference work entry


The standard model of general equilibrium is extended by allowing for expectations about supply opportunities by households and firms. In this framework there is typically a 1-dimensional continuum of underemployment equilibria that range from equilibria with arbitrarily pessimistic expectations to equilibria with rather optimistic expectations. An example illustrates the model and highlights some features of underemployment equilibria. The multiplicity of equilibria has a natural interpretation as being the result of coordination failures. The results in this framework are compared with those of the fixprice literature. Extensions to a monetary economy are discussed.


Agent optimization Animal spirits Arrow–Debreu model of general equilibrium Cobb–Douglas functions Competitive equilibrium Coordination failures Economics of general disequilibrium Excess capacity Excess demand Fixprice models Game theory General equilibrium General equilibrium models of coordination failures Incomplete markets Involuntary unemployment Keynes, J.M. Keynesianism Market clearing Neoclassical model Non-market clearing prices Pareto optimality Path connectedness Positive externalities Price rigidities Rational expectations Rationing Seigniorage Self-justifying expectations Spillover effects Strategic complementarities Supply opportunities Temporary equilibrium Underemployment equilibria Wage rigidities Walras’s law 

JEL Classifications

C62 D51 E24 D5 
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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • P. Jean-Jacques Herings
    • 1
  1. 1.