Nonconvexity and Interaction in Economic Models
11 Pages Posted: 1 Feb 1997
Date Written: Undated
Abstract
Nonconvexities are wrongly attributed to externalities per se; they can arise even in the absence of both increasing returns and missing markets. A general classification of nonconvexities is proposed, and particular attention is given to interactive nonconvexities, characterized by sufficiently large cross-partial derivatives in component functions. Three examples of this sort of nonconvexity are considered: the market for floor space in a shopping mall, interactive labor effort in an efficiency wage model, and the problem of optimal pollution control when pollutants interact in the environment. The paper considers the implications of this particular form of nonconvexity for economic theory and policy.
JEL Classification: D83
Suggested Citation: Suggested Citation