Efficiency and Equilibrium with Dynamic Increasing Aggregate Returns due to Demand Complementarities
Antonio Ciccone, Kiminori Matsuyama
Econometrica · 1999 · Volume 67 · Issue 3
Abstract
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.
Keywords
Dynamic nonconvexities at the disaggregate level, dynamic nonconvexities at the aggregate level, Hicks-Allen complements (substitutes), optimal intertemporal allocations, dynamic equilibrium allocations, dynamic inefficiencies.
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