Strategic complementarity in business formation: aggregate fluctuations and sunspot equilibria
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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