Strategic complementarity in business formation: Aggregate fluctuations and sunspot equilibria

Satyajit Chatierjee, Russell Cooper, B. Ravikumar

Research output: Contribution to journalArticle

51 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)795-811
Number of pages17
JournalReview of Economic Studies
Volume60
Issue number4
DOIs
StatePublished - Oct 1993

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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