UNSPECIFIED (2000) Ruling out multiplicity and indeterminacy: The role of heterogeneity. REVIEW OF ECONOMIC STUDIES, 67 (2). pp. 295-307. ISSN 0034-6527

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Abstract

It is well known that economies of scale that are external to the individual decision makers can lead to self-fulfilling prophecies and the multiplicity or even indeterminacy of equilibrium. We argue that the importance of this source of multiplicity and indeterminacy is overstated in representative agent models, as they ignore the potential stabilizing effect of heterogeneity. We illustrate this in a version of Matsuyama's (1991) two-sector model with increasing returns to scale. Two main results are shown. First, sufficient homogeneity with respect to individual productivity leads to the instability and non-uniqueness of a given stationary state and the indeterminacy of the corresponding stationary state equilibrium. Second, sufficient heterogeneity leads to the global saddle-path stability and the uniqueness of a given stationary state and the global uniqueness of equilibrium.

Item Type:	Journal Article
Subjects:	H Social Sciences > HC Economic History and Conditions
Journal or Publication Title:	REVIEW OF ECONOMIC STUDIES
Publisher:	REVIEW OF ECONOMIC STUDIES LTD
ISSN:	0034-6527
Date:	April 2000
Volume:	67
Number:	2
Number of Pages:	13
Page Range:	pp. 295-307
Publication Status:	Published
URI:	http://wrap.warwick.ac.uk/id/eprint/13298

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