Journal of Macroeconomics
Department or Program
Adaptive learning, Finite horizons, Multiple equilibria, Sunspots
This paper assumes that firm managers make choices over a finite horizon while households plan over an infinite horizon. Following Shea (2013), I assume that labor exhibits firm-specific learning by doing so that newly employed labor is less productive than experienced labor. In the model, optimization requires that firm managers make conjectures about how their choices affect the labor demand choices of their successors. The model yields two steady states; one where the firm manager behaves as if she cares only about the present period and another where she is forward looking. The former (myopic) steady state usually exhibits higher output than the non myopic steady state. The non-myopic steady state also exhibits two regions of indeterminacy where extraneous, self-fulfilling expectational errors add volatility. One of these regions of indeterminacy is usually stable under adaptive learning while the other never is stable under learning.
Shea, P. 2016. "Short-sighted managers and learnable sunspot equilibria." Journal of Macroeconomics. 48: 117-126. https://doi.org/10.1016/j.jmacro.2016.02.001
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.
This is the author's version of the work. This publication appears in Bates College's institutional repository by permission of the copyright owner for personal use, not for redistribution.
Required Publisher's Statement
Original version is available from the publisher at: https://doi.org/10.1016/j.jmacro.2016.02.001