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ABSTRACT:
In familiar models, a decrease in the friction facing mobile factors (e.g., lowering their adjustment costs) increases a coordination problem, leading to more circumstances where there are multiple equilibria. We show that a decrease in friction can decrease coordination problems if, for example, a production externality arises from a changing stock of knowledge or a changing environmental stock. In general, the relation between the amount of friction that mobile factors face and the likelihood of multiple equilibria is non-monotonic.

SUGGESTED CITATION:
Larry Karp, "Friction and the Multiplicity of Equilibria" (February 8, 2005). Institute for Research on Labor and Employment. Institute for Research on Labor and Employment Working Paper Series. Paper iirwps-133-06.
http://repositories.cdlib.org/iir/iirwps/iirwps-133-06