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Empirical Implications Of Alternative Models Of Firm Dynamics

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  • Pakes, Ariel
  • Ericson, Richard

Abstract

This paper considers two models for analyzing the dynamics of firm behavior that allow for idiosyncratic (or firm-specific) sources of uncertainty, and discrete outcomes (exit and/or entry). Models with these characteristics are needed for the structural econometric analysis of several economic phenomena, including the behavior of capital markets when there are significant failure probabilities, and the analysis of productivity movements in industries with large amounts of entry and exit. In addition, these models provide a means of correcting for the self-selection induced by liquidation decisions in empirical studies of firms responses to alternative policy and environmental changes. It is shown that both models have nonparametric implications - implications that depend only on basic behavioral assumptions and mild regularity conditions on the functional forms of interest - that can be taken directly to data. This circumvents the need for the computationally difficult, and functional-form specific, estimation algorithms that have been needed for analyzing stochastic control models with discrete outcomes in the past. One difference between the two models corresponds to the distinction between heterogeneity and an ergodic form of state-dependence (a form in which the effect of being in a state in a particular period erodes away as time from that period lapses). So we develop a test for this difference based on~mixing conditions. The paper concludes by checking for the implications of the two models on an eight-year panel of Wisconsin firms. We find one model to be consistent with the data for manufacturing, and the other to be consistent with the data for retail trade.

Suggested Citation

  • Pakes, Ariel & Ericson, Richard, 1988. "Empirical Implications Of Alternative Models Of Firm Dynamics," SSRI Workshop Series 292694, University of Wisconsin-Madison, Social Systems Research Institute.
  • Handle: RePEc:ags:uwssri:292694
    DOI: 10.22004/ag.econ.292694
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    References listed on IDEAS

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    1. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 53-82.
    2. Steven J. Davis & John Haltiwanger, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 819-863.
    3. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1989. "The Growth and Failure of U. S. Manufacturing Plants," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 671-698.
    4. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles," Econometrica, Econometric Society, vol. 56(3), pages 571-599, May.
    5. S.A. Lippman & R.P. Rumelt, 1982. "Uncertain Imitability: An Analysis of Interfirm Differences in Efficiency under Competition," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 418-438, Autumn.
    6. Bronwyn H. Hall, 1988. "The Effect of Takeover Activity on Corporate Research and Development," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 69-100, National Bureau of Economic Research, Inc.
    7. Evans, David S, 1987. "The Relationship between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 567-581, June.
    8. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    9. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, I: Overview and Quantity Competition with Large Fixed Costs," Econometrica, Econometric Society, vol. 56(3), pages 549-569, May.
    10. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    11. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
    12. Evans, David S, 1987. "Tests of Alternative Theories of Firm Growth," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 657-674, August.
    13. Val Eugene Lambson, 1992. "Competitive Profits in the Long Run," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 125-142.
    14. Wolak, Frank A., 1989. "Testing inequality constraints in linear econometric models," Journal of Econometrics, Elsevier, vol. 41(2), pages 205-235, June.
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