This project continues important work in the area of econometric analysis of models where the market is not in equilibrium. Many early models assumed that the economy, the labor market for instance, will always either be in equilibrium or be moving toward equilibrium. The classical model, in vogue at the beginning of the 20th century, did not allow for long term disequilibrium. The Great Depression with its long lines of unemployed workers provided overwhelming empirical evidence that involuntary unemployment is possible for extended periods of time, and thus the assumptions of rapid market equilibration had to be discarded. More modern and realistic models of the economy incorporate the concept of disequilibrium in markets in various ways, typically by allowing for rigidities such as long term contracts to be included in the analytical model. There are also models which are constructed with the idea of disequilibrium embedded in them. Such models can realistically depict many of the world's economies, particularly economies where central planning plays a large role. This project examines the econometric difficulties encountered in constructing and estimating models of economic disequilibrium. These models pose many problems for the econometrician in that the standard statistical assumptions of normally distributed errors, random variation of variables around the mean of the observed values, and constant variance from observation to observation do not hold. This project focusses on three areas of disequilibrium estimation. First, disequilibrium in the labor market is analyzed. It extends previous work by making output endogenous. Second, models of product rationning are studied. Of particular interest is the case where rationning is the result of central planning. Third, firm behavior under central planning is examined. This includes situations where the state regularly insures against firms' losses. If such bailouts become an integral part of the expectations of the firm manager, output will be affected. This research will shed light on the workings of both socialist and free market economies.
