NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Participation Dynamics: Sunspots and Cycles

Satyajit Chatterjee, Russell Cooper, B. Ravikumar

NBER Working Paper No. 3438 (Also Reprint No. r1833)
Issued in September 1990
NBER Program(s):   EFG

This paper investigates the possibility of sunspots equilibria and endogenous cycles in an overlapping generations model with strategic interactions. We consider an economy with imperfectly competitive product markets. There is a participation decision on the part of prospective firms and a strategic complementarity emerges from the interaction of firms in their entry decisions both over time and across sectors. When these complementarities are sufficiently strong, multiple steady state equilibria will exist. Sunspot equilibria can then be constructed as randomizations in the neighborhood of these steady states. We relate the properties of our sunspot equilibria to aggregate fluctuations, with particular emphasis on the dynamics of entry and exit. We also show that if intratemporal strategic interactions are sufficiently strong, then cycles may exist. Additional sunspot equilibria can be found in the neighborhood of these cycles. Finally, we show that if inter temporal linkages are sufficiently strong, cycles will not exist.

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Document Object Identifier (DOI): 10.3386/w3438

Published: "Strategic Complementarity in Business Formation: Aggregate Fluctuations and Sunspot Equilibria" Review of Economic Studies, Vol. 60, pp. 795-811 (1993).

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