A DISEQUILIBRIUM MECHANISM: WHEN MANAGERIAL DECISIONS CAUSE MACROECONOMIC INSTABILITY
A DISEQUILIBRIUM MECHANISM: WHEN MANAGERIAL DECISIONS CAUSE MACROECONOMIC INSTABILITY

Summary/Abstract: The paper aims to develop our understanding of the processes and mechanismsleading to economic instability. The research design and methods: the paperemploys a simple game-theoretic model aimed at depicting why the mechanism connectingnonmaterial motivation of managers and the propensity of economic systemsis unstable. The findings are as follows: managers, driven by the nonmaterial valueof work, choose strategies that maximize the likelihood of prolonging their employment.Shortsighted CEOs may prefer strategies that offer smooth returns and an unlikely“catastrophic event.” If the unification of strategies occurs, the situation leads toa crisis and recession in the long run. The model put forth in this paper is shown toresemble the mechanism of the 2007-2008 financial crisis.

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