EQUILIBRIUM SELECTION IN IMPERFECTLY COMPETITIVE ECONOMIES WITH MULTIPLE EQUILIBRIA

This paper investigates the selection of an equilibrium in an economy with multiple, Pareto-ranked, Nash equilibria. A history-dependent selection criterion is proposed which induces correlated behavior in equilibrium even though agents are playing one-shot games and disturbances are not correlated over time. The model economy may experience prolonged periods in which a low productivity technology is in use and then, as a consequence of a large real disturbance, may switch to an alternative equilibrium in which a high productivity technology is utilised. Thus the model qualitatively matches observations of serially correlated movements in output and employment and generates procyclical productivity though there are no exogenous technology shocks.