IMPERFECT COMPETITION AND CAPITAL ACCUMULATION - THE ROLE OF PRICE NORMALIZATION

We consider a capital-accumulation model with infinitely lived househo lds and two production sectors. The intermediate-good sector is charac terized by perfect competition, a constant-returns-to-scale technology , and production externalities. The final-good sector is a monopoly op erating under constant returns to scale. We analyze the general equili brium in the sense of Gabszewicz and Vial [Journal of Economic Theory (1972) 4: 381-400] for this economy and different price-normalization rules. It is shown that the qualitative behavior of the equilibrium pa ths depends crucially on the chosen normalization rule. In particular, whether equilibria are monotonic or oscillating and whether indetermi nacy occurs or not may depend on the choice of the numeraire.