Publication: Multiple equilibrium, variability and the development process
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1997-09
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Abstract
Per capita output is more volatile in middle-income economies than in both low-income and high-income economies. In this paper, we address this fact in a two-periods overlapping generations model with two productive sectors (a developed sector and a subsistence sector) and a credit sector. In the second period, agents can choose to operate the developed technology. To do so, they can borrow resources to pay an entry cost. Due to the presence of an extemality in the developed sector, as the fraction of managers in this sector increases, its productivity also increases. We show that, if the model economy is in the early or in the mature stages of development, there is a unique equilibrium. However, when the economy is in the middle stages of development, multiple equilibrium arise since the extemality affects the performance of the credit market. The multiplicity of equilibria disappear when the credit market is perfect or it does not exist. Moreover, we fmd that in economies with imperfect credit markets, per cap ita output volatility tends to be higher than in economies with perfect or non-existent credit markets.
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Multiple equilibrium, Externalities, Market imperfections, Sunspots, Credit market, Development