The dynamic properties of a nonlinear economic model with extreme financial frictions (Q1721716)

Summary: A generalized economic model with two kinds of agents (farmers and landlords) is investigated. Farmers produce grains by renting lands from landlords. The land which is not rented is cultivated by less productive landlords. The economy is assumed to be with extreme frictions so that there are no markets for agents to trade grains. The rental rate is determined by the equilibrium of the supply and demand. We consider the situation that farmers are likely to take more risk when the rental rate is low and have more risk aversion if the rate goes high. The psychological anticipation is taken into account in the setting of our model. Using the optimal control theory, the dynamic properties of the rental rate and its influence to the endogenous volatility are analyzed. Besides, we clarify that the rental market has an instinctive ability to dominate the anticipation of agents.