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Externalities, Expectations, and Growth

Fernando Vega-Redondo
Economic Theory
Vol. 14, No. 1 (Jul., 1999), pp. 203-218
Published by: Springer
Stable URL: http://www.jstor.org/stable/25055208
Page Count: 16
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Externalities, Expectations, and Growth
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Abstract

The paper studies a model of accumulation and growth where a continuum of heterogeneous firms play dynamically optimal strategies along a (rational expectations) equilibrium. The key feature of the model is that firms' technological decisions are assumed subject to both friction and external effects. This gives rise to a wide multiplicity of equilibrium behavior, any path of sustained growth requiring that the economy tackle a never-ending chain of fresh coordination problems. This setup is modelled as a (non-atomic) dynamic game, suitable conditions being provided that partially characterize when sustained growth is a possible (never the unique) equilibrium outcome.

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