Existence of competitive equilibrium under financial constraints and increasing returns

Abstract

In this work we analyze the existence of equilibrium under increasing returns in a limited participation model. There arc two types of agents. Producer type has an increasing returns to scale (IRS) technology with no labor endowment while worker type has onh' labor endowment. Economy consists of three periods. At each period, due to cash-in-advance constraints imposed on factor purchases, goods market opens after the labor market closes. Total money stock is assumed to be constant. With this setup we were able to establish the existence and uniqueness of competitive equlibrium with increasing returns for the special case that the agent’s preferences are being represented by logarithmic utility.