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Strategic complementarity in business formation: aggregate fluctuations and sunspot equilibria

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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.
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  • Satyajit Chatterjee & Russell W. Cooper & B. Ravikumar, 1993. "Strategic complementarity in business formation: aggregate fluctuations and sunspot equilibria," Working Papers 93-9, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:93-9
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    Keywords

    Business cycles;

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