Friction and the Multiplicity of Equilibria

Larry S. Karp and Thierry Paul
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Thierry Paul: IDEP/GREQAM

No 960R, Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series from Department of Agricultural & Resource Economics, UC Berkeley

Abstract: 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.

Keywords: Indeterminacy; Multiple equilibria; Coordination games; Factor reallocation; Environmental externality; Learning-by-doing; Costs of adjustment (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-gth and nep-mac
Date: 2005-02-08
Note: oai:cdlib1:are_ucb-1087

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