Trading on Sunspots

Boyan Jovanovic, Viktor Tsyrennikov

    Research output: Contribution to journalArticlepeer-review


    In a model with multiple Pareto-ranked equilibria, we show that the set of equilibria shrinks if we allow trade in assets that pay based on the realization of a sunspot acting as an equilibrium-selection device. When the probability of a low-output outcome is high, the desire to insure against it leads the poor to promise large transfers to the rich in the high-output state. The rich then lose the incentive to exert the effort needed to sustain the high output. Thus the opening of financial markets may destroy the high equilibrium.

    Original languageEnglish (US)
    Pages (from-to)3970-3994
    Number of pages25
    JournalAmerican Economic Review
    Issue number12
    StatePublished - Dec 2022

    ASJC Scopus subject areas

    • Economics and Econometrics


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