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Friction and the Multiplicity of Equilibria

  • Karp, Larry

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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Paper provided by Institute of Industrial Relations, UC Berkeley in its series Institute for Research on Labor and Employment, Working Paper Series with number qt0n1563b5.

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Date of creation: 08 Feb 2005
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Handle: RePEc:cdl:indrel:qt0n1563b5
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