dc.description.abstract | We study a rational expectations' competitive equilibrium in a
production economy, i.e., a system of prices at which firms' profit
maximizing production decisions and individuals' preferred affordable
consumption choices equate supply and demand in every market. We
derive the equilibrium price of the firm and the equilibrium short
term interest rate, the optimal per capita consumption in society, as
well as the risk premium on equity. First a simple linear production
technology with constant coefficients is studied, then a more general
technology, and finally a general production economy with recursive
utility is analyzed by the use of the stochastic maximum principle.
While the two first models can not explain the empirics well using
conventional preferences, the latter model is found to be much more
promising in this regard. Wa also demonstrate a simple proof for the
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