Chapter 28 Disequilibrium, self-selection, and switching models

This chapter reviews the recent literature on disequilibrium and selectivity models. The cornerstone of the disequilibrium models is the minimum condition. One of the most disturbing points in the empirical applications is that the disequilibrium models have been mechanically applied with no discussion of what disequilibrium is due to and what the consequences are. In spite of all the limitations, the model has been the model with the most empirical applications. For instance, Sealy used the model to study credit rationing in the commercial loan market. It is used to estimate demand for money and savings functions in centrally planned economies and to study the demand for consumption goods in centrally planned economies. The main application of the methodology of disequilibrium model is to regulate markets and centrally planned economies, where there are price and quantity regulations. The chapter discusses the case of controlled prices and shows the way the analysis can be applied to credit markets with interest rate ceilings.