Summary
Since the publication of Harris (1984), applied general equilibrium models with imperfect competition and economies of scale have been extensively used for analyzing international trade and development policy issues. Their attractiveness comes from their offering a natural framework for testing the empirical relevance of numerous propositions from the industrial organization and new trade theoretical literature. Their role in the recent debates on the North American Free Trade Agreement demonstrates their potential importance in policy analysis. This paper warns model builders and users that considerable caution is however needed in interpreting the results and in deriving strong policy conclusion from these models: it is shown that in this generation of applied general equilibrium models, nonuniqueness of equilibria is not a theoretical curiosum, but a potentially serious problem. Disregarding this may lead to dramatically wrong policy appraisals.
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I am particularly indebted to Tim Kehoe both for his comments and for pinpointing a flaw in a previous version of the paper. I also thank for comments, discussions and/or encouragements Irma Adelman, Len Dudley, Robert Gary-Bobo, Rick Harris, Ed Prescott, Jacques Robert, Herb Scarf, T. N. Srinivasan, and an anonymous referee. Financial support from the FCAR of the Government of Québec and from the SSHRC of the Government of Canada and hospitality from the Federal Reserve Bank of Minneapolis are gratefully acknowledged.
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Mercenier, J. Nonuniqueness of solutions in applied general equilibrium models with scale economies and imperfect competition. Econ Theory 6, 161–177 (1995). https://doi.org/10.1007/BF01213945
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DOI: https://doi.org/10.1007/BF01213945