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Testing creative destruction in an opening economy: the case of the South African manufacturing industries

P Aghion, J Fedderke, P Howitt, C Kularatne and N Viegi
Publication date
August 2008
We study a Lucas (1978) "fruit-tree" economy under the assumption that agents are Choquet expected utility (CEU) rather than standard expected utility (EU) decision makers. The agents’ nonadditive beliefs about the economy’s stochastic dividend payment process may thus express ambiguity attitudes and accommodate violations of Savage’s sure-thing principle as elicited by Ellsberg (1961). As our main formal result we establish the existence of a unique stationary equilibrium price function for the assets in this economy. In order to account for the dynamic inconsistency of CEU decision makers, we thereby use an equilibrium concept that combines the market clearing condition of general equilibrium theory with Bayesian Nash equilibrium. A simple example about the equity premium in our economy with non-additive beliefs illustrates our formal findings.
Publication PDF
Series title
Working Paper 093
Economics of Transition (Volume 21(3) 2013