Indeterminacy and increasing returns

Abstract

We investigate properties of the one-sector growth model with increasing returns under two organizational structures capable of reconciling the existence of aggregate increasing returns with competitive behavior by firms. The first involves input externalities; the second involves monopolistic competition. We show, for parameters in close accord with recent literature on real business cycles, that the model displays an indeterminate steady state that can be exploited to generate a model of business fluctuations driven by self-fulfilling beliefs. In our first class of models, growth is generated by exogenous increases in factor productivity. In the second class the marginal product of capital is large enough for endogenous growth. Journal of Economic Literature Classification Numbers: E00, E3, O40. © 1994 by Academic Press, Inc.