Dynamic Stability, Paradoxical Comparative Statics, and Factor--Market Distortions in an Economy with Three Production Sectors

In an earlier paper the authors clarified the relationship between the stability of long--run equilibrium and the possibility of paradoxical comparative statics in the Lerner--Samuelson two--by--two model of production with factor--market distortions (see "Review of International Economics" 9 (1901) :383--400). The present paper extends the analysis to an economy with three production sectors. It is found that almost all properties of long--run equilibrium in the two--by--two model with factor--market distortions continue to hold, while some new properties, such as plurality of equilibrium, appear. Specifically, the instability of the adjustment process is not ruled out; a paradox cannot coexist with stable equilibrium in a small open economy, but may do so in a closed economy. Copyright Blackwell Publishing Ltd. 2003