Book contents
6 - Timing of Discrete Choices
Published online by Cambridge University Press: 02 December 2009
Summary
One feature of aggregate behavior is the synchronization of discrete decisions such as the purchase of durable capital by firms and durable goods by households. These expenditures are important to understand in that they are extremely volatile elements of aggregate spending. Put differently, these are the elements of total expenditure that display the most time series variance. Introducing these discrete choices into traditional general equilibrium models is somewhat difficult because of the nonconvexity associated with lumpy expenditures on consumer and firm durables. One means of dealing with these nonconvexities is to look for equilibria in which there is some “smoothing by aggregation.” The effect of doing so, however, is that these discrete choices are, by construction, no longer synchronized so that their macroeconomic importance is dramatically reduced. In fact, this approach works only if agents have an incentive to take actions at different points in time.
When, in contrast, agents have an incentive to synchronize their discrete choices, then smoothing by aggregation is no longer possible. In this case, synchronized discrete decisions can matter for the macroeconomy. They can create endogenous fluctuations of the aggregate economy and magnify underlying disturbances to that economy.
The focus of this chapter is on the basis for synchronization and, more generally, the issue of the timing of economic activity. The first part of the chapter looks at incentives for the synchronization of activity. The second part goes on to explore the issue of delay.
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- Coordination Games , pp. 100 - 125Publisher: Cambridge University PressPrint publication year: 1999