History versus expectations: Increasing returns or social influence?

Abstract

Krugman [Krugman, P., 1991a. History versus expectations. Quarterly Journal of Economics 106, 651–667.] links multiple equilibria (the domains of attractions depend on history and possibly also on expectations) to the technological property of increasing returns to scale. It is shown that the recently introduced characterization of (non-moderate) social influence [Glaeser, E.L., Sacerdote, B.I., Scheinkman J.A., 2003. The social multiplier. Journal of the European Economic Association 1, 345–353.] coupled with complementarity provides the proper criterion for thresholds and multiple equilibria instead of technological characterizations (increasing returns).