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Efficiency and Equilibrium with Dynamic Increasing Aggregate Returns due to Demand Complementarities
Author(s) -
Ciccone Antonio,
Matsuyama Kiminori
Publication year - 1999
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.1111/1468-0262.00034
Subject(s) - economics , aggregate (composite) , econometrics , aggregate demand , microeconomics , monetary economics , materials science , composite material , monetary policy
When do dynamic nonconvexities at the disaggregate level translate into dynamic nonconvexities at the aggregate level? We address this question in a framework where the production of differentiated intermediate inputs is subject to dynamic nonconvexities, and we show that the answer depends on the degree of Hicks‐Allen complementarity (substitutability) between differentiated inputs. In our simplest model, a generalization of Judd (1985) and Grossman and Helpman (1991) among many others, there are dynamic nonconvexities at the aggregate level if and only if differentiated inputs are Hicks‐Allen complements. We also compare dynamic equilibrium and optimal allocations in the presence of aggregate dynamic nonconvexities due to Hicks‐Allen complementarities between differentiated inputs.