Multiple expectational equilibria under monopolistic competition

TY - JOUR

T1 - Multiple expectational equilibria under monopolistic competition

AU - Kiyotaki, Nobuhiro

N1 - Funding Information: *This is a revised version of a chapter of my Ph.D. thesis [1985], and I owe many people. Especially I would like to thank Andrew Abel, Andrew Caplin, Benjamin Friedman, Ian Gale, Mark Gertler, Oliver Hart, Andrew Lo, Andreu Mas-Colell, Kiminori Matsuyama, Kenneth Rogoff, Jeffrey Sachs, Robert Solow, Philip Srini-vasan, Steven Sullivan, and two referees and editors for helpful suggestions. Financial support of the Sloan Foundation and the Graduate School of Wisconsin are gratefully acknowledged. Any remaining errors are my own.

PY - 1988/11

Y1 - 1988/11

N2 - This paper shows that a monopolistically competitive economy with real investment can have multiple rational expectations equilibria: one is associated with entrepreneurs’ optimistic expectations about future demand; another with entrepreneurs’ pessimism. It also shows that an optimistic expectational equilibrium Pareto dominates a pessimistic equilibrium. An investment subsidy can be beneficial both by reducing the original underinvestment distortion and by changing firms’ expectations from pessimistic to optimistic. The most important assumption is increasing returns to scale, and monopolistic competition makes increasing returns consistent with each producer’s optimization.

AB - This paper shows that a monopolistically competitive economy with real investment can have multiple rational expectations equilibria: one is associated with entrepreneurs’ optimistic expectations about future demand; another with entrepreneurs’ pessimism. It also shows that an optimistic expectational equilibrium Pareto dominates a pessimistic equilibrium. An investment subsidy can be beneficial both by reducing the original underinvestment distortion and by changing firms’ expectations from pessimistic to optimistic. The most important assumption is increasing returns to scale, and monopolistic competition makes increasing returns consistent with each producer’s optimization.

UR - https://www.scopus.com/pages/publications/84959799833

UR - https://www.scopus.com/pages/publications/84959799833#tab=citedBy

U2 - 10.2307/1886070

DO - 10.2307/1886070

M3 - Article

SN - 0033-5533

VL - 103

SP - 695

EP - 713

JO - Quarterly Journal of Economics

JF - Quarterly Journal of Economics

IS - 4

ER -