Inefficient equilibria in transition economy

Abstract

The paper studies a general equilibrium in an economy where all market participants face a bid‐ask spread. The spread may be caused by indirect business taxes, middlemen rent‐seeking, delays in payments or liquidity constraints or price uncertainty. Wherever it comes from the spread causes inefficiency of the market equilibrium. We discuss some institutions that can decrease the inefficiency. One is second currency (barter exchange) in the inter‐firm transactions. It is shown that the general equilibrium in an economy with second currency is effective though is still different from Arrow–Debreu equilibrium. Another solution can be introduction of mutual trade credit. In the economy with trade credit there are multiple equilibria that are more efficient than original bid‐ask spread but still not as efficient as Arrow–Debreu one, too. The implications for firms′ integration and applicability to Russian economy are discussed.The paper generalizes some results obtained of research work that has been done in the Department of Mathematical Modeling of Economic Systems of Computing Center, Russian Academy of Science under Academician Petrov over last few years (Petrov et al., 1996, essays on Mathematical Modelling of Economy: Energoatomizdat.) We have successfully used some models of inefficient equilibrium in several applied projects.