Monash University
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Cobweb model with the trade off between sensitive incentive and stability

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journal contribution
posted on 2017-06-08, 06:52 authored by Zhang, Dingsheng
This paper uses a cobweb model to investigate coordination failure of division of labor and economic crisis caused by the trade-off between sensitive incentive and stability. There are two types of dynamic equations, one is for the number of specialists, the other is for relative prices. If the system starts from a nonequilibrium state, then the time path of the number of specialists and relative prices will converge to their static equilibrium values if feedback sensitivity coefficients are smaller than some threshold values. In this process, the more sensitive the feedback mechanism, the convergence is faster. When the feedback sensitivity coefficients have reached the threshold values, the feedback mechanism will overshoot, so that the price feedback mechanism is paralyzed and the coordination failure of the efficient network pattern of division of labor occurs. A too large value of trading efficiency coefficient has a similar effect. For given feedback sensitivity and trading efficiency, the greater the difference between the initial state and static equilibrium, the more likely it is that the coordination failure of the efficient pattern of the division of labor will occur. This model can be used to explain fluctuations of excess demand for professionals, such as lawyers and accountants, with a time lag between education and professional work. Also, it can explain the financial crisis caused by liberalization reforms that increased sensitivity coefficients or trading efficiency by raising the mobility of capital, goods, and labor.


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Department of Economics

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