History versus Expectations

In models with external economies, there are often two or more long-run equilibria. Which equilibrium is chosen? Much of the literature presumes that "history" sets initial conditions that determine the outcome, but an alternative view stresses the role of "expectations," i.e., of self-fulfilling prophecy. This paper uses a simple trade model with both external economies and adjustment costs to show how the parameters of the economy determine the relative importance of history and expectations in determining equilibrium.

[1]  P. N. Rosenstein-Rodan,et al.  Problems of Industrialisation of Eastern and South-Eastern Europe , 1943 .

[2]  J. Neary.  Dynamic Stability and the Theory of Factor-Market Distortions , 1978 .

[3]  G. Myrdal.  Economic theory and underdeveloped regions , 1965 .

[4]  A. Panagariya.  Increasing returns, dynamic stability, and international trade , 1986 .

[5]  P. Romer.  Increasing Returns and Long-Run Growth , 1986, Journal of Political Economy.

[6]  N. Kaldor.  The Irrelevance of Equilibrium Economics , 1972 .

[7]  Michael L. Mussa.  Dynamic Adjustment in the Heckscher-Ohlin-Samuelson Model , 1978, Journal of Political Economy.

[8]  Wilfred J. Ethier.  Decreasing Costs in International Trade and Frank Graham's Argument for Protection , 1982 .

[9]  R. McAfee,et al.  Stability of Equilibria with Externalities , 1988 .

[10]  M. Hirsch,et al.  Differential Equations, Dynamical Systems, and Linear Algebra , 1974 .

[11]  Reciprocal Demand and Increasing Returns , 1949 .

[12]  Paul Krugman,et al.  The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher : Notes on trade in the presence of dynamic scale economies , 1987 .

[13]  Kiminori Matsuyama,et al.  Increasing Returns, Industrialization, and Indeterminacy of Equilibrium , 1991 .

[14]  P. David.  Clio and the Economics of QWERTY , 1985 .

[15]  D. Fudenberg,et al.  Rational Expectations Business Cycles in Search Equilibrium , 1989, Journal of Political Economy.

[16]  Allyn A. Young,et al.  INCREASING RETURNS AND ECONOMIC PROGRESS , 1928 .

[17]  Paul Krugman,et al.  Trade, accumulation, and uneven development , 1981 .

[18]  F. Graham.  Some Aspects of Protection Further Considered , 1923 .

[19]  Joseph Farrell,et al.  Installed base and compatibility : innovation, product preannouncements and predation , 1986 .