Research Database

Three of the arguments made by Temin (2008) in his review of Great Depressions of the Twentieth Century are demonstrably wrong: that the treatment of the data in the volume is cursory; that the definition of great depressions is too general and, in particular, groups slow growth experiences in Latin America in the 1980s with far more severe great depressions in Europe in the 1930s; and that the book is an advertisement for the real business cycle methodology. Without these three arguments — which are the results of obvious conceptual and arithmetical errors, including copying the wrong column of data from a source — his review says little more than that he does not think it appropriate to apply our dynamic general equilibrium methodology to the study of great depressions, and he does not like the conclusion that we draw: that a successful model of a great depression needs to be able to account for the effects of government policy on productivity.

This paper describes a dynamic model in which the provision mechanism for a public project is itself the object of locational choice of individuals. Individuals in an ongoing society must choose between a Majority Rule mechanism and a Voluntary Contribution mechanism. Each mechanism determines a funding decision for a local public project which is repeated over time. Generations of individuals asynchronously supercede their “parents,” creating an entry/exit process that allows individuals with possibly different beliefs to enter society. A self confirming equilibrium (SCE) belief process describes an evolution of beliefs in this society consistent with a self confirming equilibrium of the repeated location/provision game. Due to Fudenberg and Levine (1993), SCE is weaker than Nash as it requires correct forecasts of an individual only along the realized path during the individual's lifetime. Since individuals' beliefs on out-of-equilibrium behavior may vary, an SCE belief process may admit random and heterogenous forecasts in the form of mutations of beliefs across generations as newborn individuals enter the system. It is shown that the process with belief mutation results in a globally absorbing state in which the Majority Rule mechanism is the unique survivor of the two.