Ruling Out Multiplicity and Indeterminacy: The Role of Heterogeneity

Posted: 20 Jan 2001

See all articles by Berthold Herrendorf

Berthold Herrendorf

Arizona State University (ASU) - Economics Department

Robert Waldmann

Universita di Roma Tor Vergata; National Bureau of Economic Research (NBER)

Akos Valentinyi

University of Manchester; CERS-HAS; CEPR

Abstract

It is well known that economies of scale that are external to the individual decision makers can lead to self-fulfilling prophecies and the multiplicity or even indeterminacy of equilibrium. We argue that the importance of this source of multiplicity and indeterminacy is overstated in representative agent models, as they ignore the potential stabilizing effect of heterogeneity. We illustrate this in a version of Matsuyamas (1991) two-sector model with increasing returns to scale. Two main results are shown. First, sufficient homogeneity with respect to individual productivity leads to the instability and non-uniqueness of a given stationary state and the indeterminacy of the corresponding stationary state equilibrium. Second, sufficient heterogeneity leads to the global saddle-path stability and the uniqueness of a given stationary state and the global uniqueness of equilibrium.

JEL Classification: D50

Suggested Citation

Herrendorf, Berthold and Waldmann, Robert and Valentinyi, Akos, Ruling Out Multiplicity and Indeterminacy: The Role of Heterogeneity. The Review of Economic Studies, Vol. 67, No. 2, 2000 . Available at SSRN: https://ssrn.com/abstract=234848

Berthold Herrendorf (Contact Author)

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

Robert Waldmann

Universita di Roma Tor Vergata ( email )

Piazzale Aldo Moro 5
Roma, Rome 00185
Italy

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Akos Valentinyi

University of Manchester ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

CERS-HAS ( email )

Budaorsi ut 45
Budapest, 1112
Hungary

CEPR

London
United Kingdom

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