KIER DISCUSSION PAPER SERIES Sunspot Equilibria in a Production Economy: Do Rational Animal Spirits Cause Overproduction?

We study a standard two period economy with one nominal bond and one …rm. The input of the …rm is done in the …rst period and …nanced with the nominal bond, and its pro…ts are distributed to the shareholders in the second period. We show that a sunspot equilibrium exists around each e¢ cient equilibrium. The interest rate is lower than optimal and there is over production in sunspot equilibria, under some conditions. But a sunspot equilibrium does not exist if the pro…t share can be traded as well as the bond. (JEL classi…cation numbers: D52, D53, D61) Contact information of the author: name: Atsushi Kajii a¢ liation and mailing address: Institute of Economic Research, Kyoto University, Sakyo-ku, Kyoto 6068501, JAPAN. phone: +81-75-753-7112, fax: +81-75-753-7198, E-mail: [email protected] This paper is prepared for an invited lecture at the fall meeting of the Japanese Economic Association held at Kinki University on 21 September 2008. A …nancial support by the Inamori Foundation and the Grant-in-Aid for Scienti…c Research are gratefully acknowledged. The author thanks Piero Gottardi and Chiaki Hara for their helpful comments, and is solely responsible for remaining errors and omissions.