Journal Article

Ruling Out Multiplicity and Indeterminacy: The Role of Heterogeneity

Berthold Herrendorf, Ákos Valentinyi and Robert Waldmann

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 67, issue 2, pages 295-307
Published in print April 2000 | ISSN: 0034-6527
Published online April 2000 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00132
Ruling Out Multiplicity and Indeterminacy: The Role of Heterogeneity

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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.

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Subjects: Economics

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