Multiple Equilibria with Externalities

We analyse the implications of multiple Nash equilibria in consumption patterns. Multiple equilibrium theory has been extensively used in macroeconomics to explain the convergence of the system to a low inefficient equilibrium. Its microfoundations appear very abstract and stylised. It has been recognised that a rigourous microfoundation matters above all when policy and dynamic implications are considered. For example, Cahuc and Kempf (1997) show that, just by assuming a restrictive number of players, the standard result of Pareto superior simultaneous solutions on staggered decisions is not confirmed, or that introducing a more specific framework, the general expansionary demand policies do not generate the beneficial effects predicted by general stylised models (see Pagano (1990) for a discussion). The main contribution of this paper is to provide a more specific microfoundation of multiple equilibria in consumption theory.