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Ruling out multiplicity and indeterminacy: The role of heterogeneity

Herrendorf, B., Valentinyi, Akos and Waldmann, R. 2000. Ruling out multiplicity and indeterminacy: The role of heterogeneity. Review of Economic Studies 67 (2) , pp. 295-307. 10.1111/1467-937X.00132

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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: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
H Social Sciences > HG Finance
Publisher: Oxford University Press
ISSN: 0034-6527
Last Modified: 01 Feb 2017 04:16

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