Corporations’ Investment, Market Value, and Involuntary Unemployment in a Stock Market Overlapping Generations Model: A Purely Theoretical Exercise

Abstract

It is the aim of this purely theoretical paper to model corporations’ investment decision under market value maximization and managers’ “beliefs” about sales of future production output such that involuntary unemployment in a stock market overlapping generations model occurs. In contrast to New-Keynesian macro-models, unemployment is not traced back to inflexible prices and wage rates, but to inflexible aggregate investment based on corporation managers’ expectations regarding future sales of the production output enabled by present investment. After setting up the stock market model, sufficient conditions for the existence and dynamic stability of a steady state with involuntary unemployment are presented and the comparative dynamics of this steady state is investigated. Both the rise in investors’ optimism and the decline of the savings rate decrease unemployment in the short and in long run.