The knowledge problem, entrepreneurial discovery, and Austrian market process theory

Using a stylized model of the used car market, we extend the formal theory, of the Austrian market process in three directions. First, we incorporate the knowledge problem and entrepreneurial alertness for the discovery of previously unknown information. Second, we allow for the possibility that entrepreneurs may make mistakes. Third, we describe the effect of entrepreneurial behavior on dis-equilibrium market adjustment. We give conditions under which an equilibrium exists for an Austrian market process with these elements and we analyze the stability properties of the equilibrium. Furthermore, we show that the model has interesting welfare properties- a commodity tax may increase or decrease welfare. Journal of Economic Literature Classification Number: D50 (C) 2000 Academic Press.