Sunspot-like effects of random endowments

Random endowments can affect economic outcomes in two ways: directly, by affecting resources, and indirectly, by endogenously affecting expectations. This second effect, which we call a sunspot-like effect, allows prices to overreact to movements in fundamentals. We prove that sunspot equilibria can be viewed as the limiting case of markets overreacting to small shocks to fundamentals. Two examples illustrate the theorem and show that sunspot-like effects can be present even with significant shocks to fundamentals.