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Ruling out multiplicity and indeterminacy: the role of heterogeneity

Ruling out multiplicity and indeterminacy: the role of heterogeneity
Ruling out multiplicity and indeterminacy: the role of heterogeneity
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 thissource 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.
0034-6527
295-307
Herrendorf, Berthold
3cf68f14-808a-42a7-9642-85b757775096
Valentinyi, Ákos
89a3ce98-544f-448b-90fd-29c82e1916ab
Waldmann, Robert
15c5f2a1-b841-468f-83e4-d124d7740cba
Herrendorf, Berthold
3cf68f14-808a-42a7-9642-85b757775096
Valentinyi, Ákos
89a3ce98-544f-448b-90fd-29c82e1916ab
Waldmann, Robert
15c5f2a1-b841-468f-83e4-d124d7740cba

Herrendorf, Berthold, Valentinyi, Ákos and Waldmann, Robert (2000) Ruling out multiplicity and indeterminacy: the role of heterogeneity. The Review of Economic Studies, 67 (2), 295-307. (doi:10.1111/1467-937X.00132).

Record type: Article

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 thissource 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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More information

Published date: 2000
Organisations: Economics

Identifiers

Local EPrints ID: 33447
URI: https://eprints.soton.ac.uk/id/eprint/33447
ISSN: 0034-6527
PURE UUID: 368142fc-f235-42b9-b45e-4e28e6b1fae4

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Date deposited: 19 Jul 2006
Last modified: 13 Jul 2018 16:31

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