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Indivisibilities, Lotteries, and Sunspot Equilibria

Staff Report 133 | Published January 1, 1991

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Indivisibilities, Lotteries, and Sunspot Equilibria


We analyze economies with indivisible commodities. There are two reasons for doing so. First, we extend and provide new insights into sunspot equilibrium theory. Finite competitive economies with perfect markets and convex consumption sets do not allow sunspot equilibria; these same economies with nonconvex consumption sets do, and they have several properties that can never arise in convex environments. Second, we provide a reinterpretation of the employment lotteries used in contract theory and in macroeconomic models with indivisible labor. We show how socially optimal employment lotteries can be decentralized as competitive equilibria once sunspots are introduced.

Published in: _Economic Theory_ (Vol. 3, Issue 1, March 1993, pp. 1-17)