Efficiency and Equilibrium with Dynamic Increasing Aggregate Returns Due to Demand Complementarities

When do dynamic nonconvexities at the disaggregate level translate into dynamic nonconvexities at the aggregate level? The authors address this question in a framework where the production of differentiated intermediate inputs is subject to dynamic nonconvexities and show that the answer depends on the degree of Hicks-Allen complementarity between differentiated inputs. In the simplest case, there are dynamic nonconvexities at the aggregate level if and only if differentiated inputs are Hicks-Allen complements. The authors also compare dynamic equilibrium and optimal allocations in the presence of aggregate dynamic nonconvexities due to Hicks-Allen complementarities between differentiated inputs.