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Learning and firm dynamics in a stochastic equilibrium

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  • Tian, Can

Abstract

New firms have unknown profitability types, but they learn in the market. With imperfect information, the learning mechanism matters at the firm level and in the aggregate. This paper studies the effect of learning on the distribution of firms, aggregate dynamics, and welfare when firm growth and the entry and exit dynamics are belief-driven. Aggregate uncertainty affects heterogeneous firm beliefs about own types. Faster learning raises firms' continuation values, lowers the selection threshold belief, and thickens the belief distribution's right tail. Aggregate uncertainty lowers firm value by reducing firms' learning speed. Transitory aggregate shocks have persistent impacts on the economy by shifting existing firms' belief updating paths, affecting firm decisions along both intensive and extensive margins. Faster learning improves social welfare.

Suggested Citation

  • Tian, Can, 2022. "Learning and firm dynamics in a stochastic equilibrium," Journal of Economic Theory, Elsevier, vol. 203(C).
    • Handle: RePEc:eee:jetheo:v:203:y:2022:i:c:s002205312200076x
    DOI: 10.1016/j.jet.2022.105486
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    More about this item

    Keywords

    Imperfect information; Learning speed; Entry and exit; Cross-sectional distribution; Aggregate uncertainty;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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