Friction and the Multiplicity of Equilibria

Abstract

A large body of literature shows that a decrease in the friction facing mobile factors (e.g., their adjustment costs) tends to increase certain coordination problems, 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.