Monopolistic Competition, Risk Aversion, and Equilibrium Recessions

Jeff Frank

The Quarterly Journal of Economics, 1990, vol. 105, issue 4, 921-938

Abstract: This paper considers a model with monopolistic competition and multiple equilibria, rankable by output, employment, and the Pareto criterion. While papers in the literature assume a linear production technology and derive a continuum of equilibria, we assume a standard diminishing returns production function and find a finite set of equilibria. Our new feature is the assumption that firms behave in a risk-averse manner. A low-level equilibrium is sustainable because firms, at the low profits level associated with the equilibrium, become extremely cautious in their employment decisions.

Date: 1990
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