on market dynamics for a durable good. with and without a financing constraint

abstract: it has become increasingly realised that walrasian market adjustment mechanisms, at least in the form popularised by p .a. samuelson (1941) in his foundations, may in some circumstances yield an inadequate representation of price and quantity dynamics. in situations where nothing approximating in its effects the walrasian auctionneer exists, there may be complicated internal dynamics incorporating the acquisition and processing of information by the agents concerned. these internal dynamics may imply a behaviour for manifest prices and quantities very different from the walrasian scheme, where price is assumed to change only in response to a discrepancy between flow demand and flow supply. in the present paper we construct a modelin which we attempt to allow for some of these internal dynamics. in the sense that it is cast in terms of a price distribution which is at least in principle easily observable, namely that at which transactions actually occur, the model represents an extension of walrasian analysis. on the other hand, it stops short of the (possibly unattainable) task of representing in a simple way the full internal dynamics of the system, a burden to which the literature has so far not been equal. a model ofthis kind should be able to tell us what happens when a variation in one or more of the underlying assumptions occurs. one of the most interesting and important of these, both from the theoretical and practical point of view, is the case where buyers may be subject to a financing constraint. the role of financing constraints in general has received widespread attention as a result of the so-called "keynesian reinterpretation". to financial economists, it appears as the phenomenon of credit rationing, which may have either a temporary aspect, or else be of more permanent duration ("equilibrium rationing" in the terminology of d.m. jaffee and f. modigliani (1969)). rationing of any kind has always been of interest in economic theory because of the implied contrast between two forms of stabilisation or control, the one based on a diktat of some kind, the other emerging out of the unencumbered operation of a pricing system. from the practical point of view this contrast is full of interest for those fortunate or unfortunate enough to live in a financial milieu of heavily regulated interest rates, particularly in respect of mortgage rates on real estate. whether or not it is true that frustrated buyers succeed in obtaining finance from an uncontrolled fringe market, the question as to whether such direct controls would succeed of themselves in stabilising the housing market is obviously of interest. the model we establish appears to yield some useful insights into the effects of rationing of this kind. the scheme of the paper is as follows. in section i we establish the basic model and its equilibrium properties. the dynamics are investigated in section ii. we investigate here a question of some importance which does not seem to have been treated in the literature, namely whether a market is more or less stable the more imperfect is the information acquisition and processing on the part of its agents. does "friction" increase or decrease a market's rate of convergence to equilibrium? in the third and final section we impose credit rationing constraints of two kinds and study equilibrium and disequilibrium properties of the resulting system.