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Equilibrium theory for economic policy

Research project P4/01 (Research action P4)

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Description :

Equilibrium Theory is central to economic analysis. It is the basis of both the logical consistency of economic models and their relevance to understanding socio-economic phenomena. The objective of the project is to pursue integration of the two different approaches to equilibrium developed in economics: the general competitive approach, stressing the role of prices and markets in coordinating the choices of many individuals with different characteristics, and the strategic approach, focusing upon interactions between agents with divergent goals and upon the need for various institutional and contractual arrangements. Empirical investigations and policy applications have made clear the need to integrate these two approaches.

The project relies on strong complementarities between the different institutional partners, developing through diverse joint activities and collaborations:

First, general equilibrium models will be extended in several directions: formation of expectations, learning and bounded rationality, asymmetric information and imperfect competition. The dynamics of such extensions will be studied in overlapping generations (OLG) models.

Second, the econometrics of dynamic models will be developed, with special emphasis on tools for analysing financial data. The use of simulation-based inference methods will be explored. Non-parametric and semi-parametric methods will be applied to efficiency analysis, frontier models, and duration analysis.

Third, in optimisation, the major goal is to develop algorithms adequate for handling large-scale applied models. In nonlinear optimisation, interior point methods should be further developed. Economic equilibrium models will be formulated as variational inequality problems and transformed into non-linear complementarity problems. Efforts will also be devoted to discrete optimisation in order to deal with problems involving indivisibilities, such as those encountered in telecommunications and network design, in production planning and scheduling.

Lastly, a few applied topics have been selected, where complementarities between the different teams should prove particularly fruitful:

.agency problems in financial economics and the econometrics of financial markets;
.unemployment and regulation of the labour market;
.international agreements on environmental issues;
.regulatory mechanisms in health care;
.the functioning of particular auction markets;
.oligopolistic competition and the regulation of communication technology and networking industries;
.economic integration and federalism.

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