Sunspot Equilibria in a Production Economy: Do Rational Animal Spirits Cause Overproduction?

Abstract

We study a standard two period economy with one nominal bond and one firm. The input of the firm is done in the first period and financed with the nominal bond, and its profits are distributed to the shareholders in the second period. We show that a sunspot equilibrium exists around each efficient equilibrium. The interest rate is lower than optimal and there is over production in sunspot equilibria, under some conditions. But a sunspot equilibrium does not exist if the profit share can be traded as well as the bond.