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Strategic Complementarity in Business Formation: Aggregate Fluctuations and Sunspot Equilibria

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  • Satyajit Chatterjee
  • Russell 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 decisions 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 neighbourhood of the multiple steady states providing a source of aggregate fluctuations.

Suggested Citation

  • Satyajit Chatterjee & Russell Cooper & B. Ravikumar, 1993. "Strategic Complementarity in Business Formation: Aggregate Fluctuations and Sunspot Equilibria," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 795-811.
  • Handle: RePEc:oup:restud:v:60:y:1993:i:4:p:795-811.
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