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Friction and the Multiplicity of Equilibria

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  • Karp, Larry
  • Paul, Thierry

Abstract

In familiar models, a decrease in the friction facing mobile factors (e.g., lowering their adjustment costs) increases a coordination problem, leading to more circumstances where there are multiple equilibria. We show that a decrease in friction can decrease coordination problems if, for example, a production externality arises from a changing stock of knowledge or a changing environmental stock. In general, the relation between the amount of friction that mobile factors face and the likelihood of multiple equilibria is non-monotonic.

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Bibliographic Info

Paper provided by Department of Agricultural & Resource Economics, UC Berkeley in its series Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series with number qt1r57v43d.

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Date of creation: 08 Feb 2005
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Handle: RePEc:cdl:agrebk:qt1r57v43d

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Keywords: Indeterminacy; Multiple equilibria; Coordination games; Factor reallocation; Environmental externality; Learning-by-doing; Costs of adjustment;

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