Coordination failure in an industrial society

Summary Different macroeconomic theories of coordination failure are dealt with. Using simple models it is shown that externalities may lead to multiple Pareto-ranked equilibria or, under suitable assumptions, to a continuum of equilibria. It is argued that in industrial societies imperfect competition is predominant. Therefore, demand externalities may be the main cause of low level equilibria. Trading externalities and searching externalities may play a supplementary role. The theory of coordination failure is based on complete markets and price flexibility. Despite its strong appeal, it has certain shortcomings which are also discussed in the paper.I would like to thank S.K. Kuipers and A. van Schaik for their useful comments on an earlier version of this paper.