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Experimentation by Firms, Distortions, and Aggregate Productivity

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  • Alain Gabler

    (Swiss National Bank)

  • Markus Poschke

    (McGill University)

Abstract

This paper evaluates the size of these effects when distortions affect not only resource allocation but also the evolution of firm level productivity itself. To this end, we partially endogenize the evolution of firm level productivity in a standard heterogeneous firm model by allowing firms to engage in costly, purposeful experimentation: Firms can engage in risky experiments, which take the form of productivity shocks. Results from failed experiments can be discarded. We then show that endogenous productivity implies up to twice as large effects of productivity-dependent distortions on aggregate consumption. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2012.10.010
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 16 (2013)
Issue (Month): 1 (January)
Pages: 26-38

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Handle: RePEc:red:issued:11-62

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Keywords: Aggregate productivity; Firm dynamics; Selection; Experimentation; Entry and exit;

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References

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Citations

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Cited by:
  1. Maliranta, Mika & Määttänen, Niku, 2013. "Allocation and industry productivity: Accounting for firm turnover," ETLA Working Papers, The Research Institute of the Finnish Economy 11, The Research Institute of the Finnish Economy.
  2. Diego Restuccia, 2013. "factor misallocation and development," The New Palgrave Dictionary of Economics, Palgrave Macmillan, Palgrave Macmillan.
  3. Javad Sadeghzadeh, 2014. "Innovation Subsidies: Misallocation and Technology Upgrade," 2014 Papers, Job Market Papers psa1207, Job Market Papers.
  4. Hyytinen, Ari & Maliranta, Mika, 2013. "Firm lifecycles and evolution of industry productivity," Research Policy, Elsevier, Elsevier, vol. 42(5), pages 1080-1098.
  5. Poschke, Markus, 2013. "The Decision to Become an Entrepreneur and the Firm Size Distribution: A Unifying Framework for Policy Analysis," IZA Discussion Papers 7757, Institute for the Study of Labor (IZA).

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