ATAVISTIC DYNAMICS IN A 2-SECTOR ECONOMY

For general restrictions on the discount rate and factor intensities Benhabib and Nishimura [J. Econ. Theory 35 (1985), 284-306], Boldrin [Paths of optimal accumulation in two-sector models, in ''Economic Complexity: Chaos, Sunspots, Bubbles and Nonlinearity'' (W. Barnett, J. Geweke, and K. Shell, Eds.), 231-252, Cambridge Univ. Press, Cambridge], and Boldrin and Deneckere [J. Econ. Dynam. Control 14 (1990), 627-653] generate pareto-efficient cycles in two-sector models of competitive economies with a unique perfect foresight equilibrium. This paper demonstrates that another kind of market instability can be generated under appropriate restrictions on factor intensities and discounting. When the economy is close to equilibrium, the representative agent may both underemploy labor and invest in capital that is not sustained in equilibrium. This policy pulls the economy away from equilibrium for a significant period of time and is denoted atavistic. (C) 1994 Academic Press, Inc.