Indeterminacy with Non-Separable Utility

Abstract

J. Benhabib and R. E. A. Farmer (1904, J. Econ Theory 63, 19-41) showed that a single sector growth model in the presence of increasing returns-to-scale may display an indeterminate equilibrium if the demand and supply curves cross with the wrong slopes. We generalize their result to a model with preferences that are non-separable in consumption and leisure. We provide a simple analog of the Benhabib Farmer condition that works in the non-separable case. Our condition is easy to check in practice and it allows for equilibria to be indeterminate, even when demand and supply curves have the standard slopes. We illustrate that equilibrium can be indeterminate when demand and supply curves have standard slopes and the degree of increasing returns-to-scale is well within recent estimates by S. Basu and J. Fernald (1997. J. Polit. Econ. 105, 249-283) for U. S. manufacturing. Journal of Economic Literature Classification Numbers: E10. E32, D90. (C) 2000 Academic Press.