Econometrica: Mar 1994, Volume 62, Issue 2

Growth and Indeterminancy in Dynamic Models with Externalities

https://doi.org/0012-9682(199403)62:2<323:GAIIDM>2.0.CO;2-7
p. 323-342

Aldo Rustichini, Michele Boldrin

We study the indeterminacy of equilibria in infinite horizon capital accumulation models with technological externalities. Our investigation encompasses models with bounded and unbounded accumulation paths, and models with one and two sectors of production. Under reasonable assumptions we find that equilibria are locally unique in one-sector economies. In economies with two sectors of production it is instead easy to construct examples where a positive external effect induces a two-dimensional manifold of equilibria converging to the same steady state (in the bounded case) or to the same constant growth rate (in the unbounded case). For the latter we point out that the dynamic behavior of these equilibria is quite complicated and that persistent fluctuations in their growth rates are possible.

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