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History and Coordination Failure

Alícia Adserà and Debraj Ray
Journal of Economic Growth
Vol. 3, No. 3 (Sep., 1998), pp. 267-276
Published by: Springer
Stable URL: http://www.jstor.org/stable/40215986
Page Count: 10
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History and Coordination Failure
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Abstract

An extensive literature discusses the existence of a virtuous circle of expectations that might lead communities to Pareto-superior states among multiple potential equilibria. It is generally accepted that such multiplicity stems fundamentally from the presence of positive agglomeration externalities. We examine a two-sector model in this class and look for intertemporal perfect foresight equilibria. It turns out that under some plausible conditions, positive externalities must coexist with external dieconomies elsewhere in the model, for there to exist equilibria that break free of historical initial conditions. Our main distinguishing assumption is that the positive agglomeration externalities appear with a time lag (that can be made vanishingly small). Then, in the absence of external diseconomies elsewhere, the long-run behaviour of the economy resembles that predicted by myopic adjustment. This finding is independent of the degree of forward-looking behavior exhibited by the agents.

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