No.8 Stability of the Market Economy in the Presence of Diverse Economic Agents
The stability of market economy is defined and stability conditions deduced which do not restrict preferences in any manner. This assumes importance when considering economies where diversity among agents is know to exist. It is shown that if a regularity condition is satisfied then equilibria will be locally asymptotically stable. When this regularity condition is not met, it is shown how redistributing resources may lead to stable competitive equilibrium. It is also shown how instead of imposing credible penalties, which may cause significant incentive problems, redistributing purchasing power may serve to provide the correct incentives to agents who otherwise might have contributed to market failure.