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Strategic complementarity in business formation: aggregate fluctuations and sunspot equilibria

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Author Info

  • Satyajit Chatterjee
  • Russell W. Cooper
  • B. Ravikumar

Abstract

The possibility of sunspot equilibria and endogenous cycles are explored in a two-sector overlapping-generations model with entry. It is shown that if prospective entrants act oligopolistically as producers but competitively as consumers, then a strategic complementarity between the entry decision of agents across sectors and across time may arise. If the complementarity is sufficiently strong, the economy will have multiple, Pareto-ranked steady states. Stationary sunspot equilibria can then be constructed as a randomization between allocations in the neighborhood of the multiple steady states providing a source of aggregate fluctuations. Copyright 1993 by The Review of Economic Studies Limited.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 93-9.

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Date of creation: 1993
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Handle: RePEc:fip:fedpwp:93-9

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Keywords: Business cycles;

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