Introduction

Outline

In this paper, I study the stability of an adjustment process on prices and quantities that converges in finitely many steps to an equilibrium admitting excess supply of (some) factors of production. The finite convergence results from the fact that the leading adjustments are finite, and the equilibrium concept allows for ε-discrepancies between transacted input levels and those required by technology. The excess supply of factors of production at the equilibrium is associated with downward rigidities of nominal factor prices. Such an equilibrium is a special case of the socalled ‘supply-constrained equilibria’ studied by Dehez and Drèze (1984), following a seminal contribution of van der Laan (1980). These rigidities are best understood as reflecting non-competitive supply behaviour by owners of the production factors. (Here, the supply of factors by individual households is modelled as totally inelastic to prices, whose downward rigidity may be viewed as a form of collective income protection.)

The modelling of the economy embodies a distinction between primary inputs and other commodities. The leading adjustments concern the prices and quantities of primary inputs; quantity adjustments reflect the profit seeking decisions of producers (firms) and price increases take place under the pressure of excess demand. Thus, the quantity adjustments are decentralised firm by firm, and the price adjustments are decentralised market by market.