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Dynamic Behavior of Imperfectly Competitive Economies with Multiple Equilibria

  • Russell Cooper
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    This paper investigates the dynamic behavior of an economy with multiple Nash equilibria. The first part of the paper analyzes an abstract game exhibiting multiple equilibria. A history dependent selection criterion is proposed which induces correlated behavior in equilibrium even though agents are playing one-shot games and disturbances are not correlated over time. The second part of the paper investigates a specific model of multiple equilibria. Here the multiplicity is induced by the presence of a discrete decision on the part of firms regarding their choice of technique. The implications of the selection criterion introduced in the first part of the paper are illustrated through this example. Again correlated behavior emerges in a sequence of independent one-shot games. The model economy may also experience prolonged periods in which a low productivity technology is in use and then, as a consequence of a large real disturbance, may switch to an alternative equilibrium in which a high productivity technology is utilized. The paper also discusses the Pareto ordering of these equilibria.

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    File URL: http://www.nber.org/papers/w2388.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2388.

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    Date of creation: Sep 1987
    Date of revision:
    Publication status: Published as "Equilibrium Selection in Imperfectly Competitive Economieswith Multiple Equilibria", EJ, Vol. 104, no. 426 (1994): 1106-1122.
    Handle: RePEc:nbr:nberwo:2388
    Note: EFG
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    Web page: http://www.nber.org
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    1. Debreu, Gerard, 1970. "Economies with a Finite Set of Equilibria," Econometrica, Econometric Society, vol. 38(3), pages 387-92, May.
    2. Friedman, James W., 1985. "Cooperative equilibria in finite horizon noncooperative supergames," Journal of Economic Theory, Elsevier, vol. 35(2), pages 390-398, August.
    3. Shleifer, Andrei, 1986. "Implementation Cycles," Scholarly Articles 3451303, Harvard University Department of Economics.
    4. Hart, Oliver, 1982. "A Model of Imperfect Competition with Keynesian Features," The Quarterly Journal of Economics, MIT Press, vol. 97(1), pages 109-38, February.
    5. Furth, Dave, 1986. "Stability and instability in oligopoly," Journal of Economic Theory, Elsevier, vol. 40(2), pages 197-228, December.
    6. Benoit, Jean-Pierre & Krishna, Vijay, 1985. "Finitely Repeated Games," Econometrica, Econometric Society, vol. 53(4), pages 905-22, July.
    7. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
    8. Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-20, September.
    9. John Haltiwanger & Michael Waldman, 1983. "Rational Expectations and the Limits of Rationality: An Analysis of Heterogeneity," UCLA Economics Working Papers 303, UCLA Department of Economics.
    10. Howitt, Peter, 1985. "Transaction Costs in the Theory of Unemployment," American Economic Review, American Economic Association, vol. 75(1), pages 88-100, March.
    11. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
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