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Industry dynamics with stochastic demand

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  • James Bergin
  • Dan Bernhardt

Abstract

We study the dynamics of an industry subject to aggregate demand shocks where the productivity of a firm's technology evolves stochastically over time. To characterize the intertemporal evolution of the distribution of firms, we discuss in particular how exit decisions, aggregate output, profits, and distributions of firm productivities vary (a) across different demand realization paths; (b) along a demand history path, detailing the effects of continued good or bad market conditions; and (c) for different anticipated future market conditions. We show how poor demand conditions can lead to increased exit of low-productivity firms at all future dates and states and raise welfare due to the impact on exit decisions. Copyright (c)2008, RAND.

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Bibliographic Info

Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 39 (2008)
Issue (Month): 1 ()
Pages: 41-68

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Handle: RePEc:bla:randje:v:39:y:2008:i:1:p:41-68

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  1. Hopenhayn, Hugo A., 1992. "Exit, selection, and the value of firms," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 16(3-4), pages 621-653.
  2. Ricardo J. Caballero & Mohamad L. Hammour, 1991. "The Cleansing Effect of Recessions," NBER Working Papers 3922, National Bureau of Economic Research, Inc.
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  5. Boyan Jovanovic & Glenn MacDonald, 1993. "Competitive Diffusion," NBER Working Papers 4463, National Bureau of Economic Research, Inc.
  6. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 60(5), pages 1127-50, September.
  7. Dunne, Timothy & Roberts, Mark J & Samuelson, Larry, 1989. "Plant Turnover and Gross Employment Flows in the U.S. Manufacturing Sector," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 7(1), pages 48-71, January.
  8. Jovanovic, B. & MacDonald, G.M., 1992. "The Life-Cycle of Competitive Industry," Papers, Rochester, Business - Financial Research and Policy Studies 92-09, Rochester, Business - Financial Research and Policy Studies.
  9. Baldwin,John R. & Gorecki,Paul With contributions by-Name:Caves,Richard E., 1998. "The Dynamics of Industrial Competition," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521633574.
  10. Jeffrey R. Campbell, 1997. "Computational Appendix to Entry, Exit, Embodied Technology, and Business Cycles," Technical Appendices, Review of Economic Dynamics campbell98, Review of Economic Dynamics.
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  15. Levinsohn, J. & Petrin, A., 1999. "When Industries Become More Productive, Do Firms?: Investigating Productivity Dynamics," Working Papers, Research Seminar in International Economics, University of Michigan 445, Research Seminar in International Economics, University of Michigan.
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  23. Bergin, J & Bernhardt, D, 1995. "Anonymous Sequential Games: Existence and Characterization of Equilibria," Economic Theory, Springer, Springer, vol. 5(3), pages 461-89, May.
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  27. repec:fth:michin:445 is not listed on IDEAS
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Cited by:
  1. John Duggan, 2012. "Noisy Stochastic Games," RCER Working Papers 570, University of Rochester - Center for Economic Research (RCER).
  2. John Duggan, 2011. "Noisy Stochastic Games," RCER Working Papers 562, University of Rochester - Center for Economic Research (RCER).
  3. Santanu Roy & Takashi Kamihigashi, 2004. "Investment, Externalities & Industry Dynamics," Econometric Society 2004 North American Summer Meetings, Econometric Society 144, Econometric Society.

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