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Entry and the accumulation of capital: a two state-variable extension to the Ramsey model

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Abstract

In this paper we consider the entry and exit of firms in a dynamic general equilibrium model with capital. At the firm level, there is a fixed cost combined with increasing marginal cost, which gives a standard U-shaped cost curve with optimal firm size. Entry is determined by a free entry condition such that the costs of entry are equal to the present value of incumbent firms, the cost of entry (exit) depends on the flow of entry (exit). Then equilibrium is saddle-point stable and the stable manifold is two-dimensional. Transitional dynamics can, under certain circumstances, be non-monotonic.

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  • Brito, Paulo & Dixon, Huw David, 2007. "Entry and the accumulation of capital: a two state-variable extension to the Ramsey model," Cardiff Economics Working Papers E2007/16, Cardiff University, Cardiff Business School, Economics Section, revised Oct 2007.
  • Handle: RePEc:cdf:wpaper:2007/16
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    1. Novshek, William & Sonnenschein, Hugo, 1987. "General Equilibrium with Free Entry: A Synthetic Approach to the Theory of Perfect Competition," Journal of Economic Literature, American Economic Association, pages 1281-1306.
    2. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, number 9780521331586, December.
    3. Devereux, Michael B & Head, Allen C & Lapham, Beverly J, 1996. "Monopolistic Competition, Increasing Returns, and the Effects of Government Spending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 233-254, May.
    4. Koji Okuguchi, 1972. "A Dynamic Model of Firm Entry: Comment," Review of Economic Studies, Oxford University Press, vol. 39(4), pages 521-522.
    5. Coto-Martinez, Javier & Dixon, Huw, 2003. "Profits, markups and entry: fiscal policy in an open economy," Journal of Economic Dynamics and Control, Elsevier, pages 573-597.
    6. Julio J. Rotemberg & Michael Woodford, 1991. "Markups and the Business Cycle," NBER Chapters,in: NBER Macroeconomics Annual 1991, Volume 6, pages 63-140 National Bureau of Economic Research, Inc.
    7. Smith, Vernon L., 1974. "Optimal costly firm entry in general equilibrium," Journal of Economic Theory, Elsevier, pages 397-417.
    8. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, pages 1-15.
    9. Heijdra, Ben J, 1998. "Fiscal Policy Multipliers: The Role of Monopolistic Competition, Scale Economies, and Intertemporal Substitution in Labour Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 659-696, August.
    10. Ryder, Harl E, Jr, 1969. "Optimal Accumulation in a Two-Sector Neoclassical Economy with Non-Shiftable Capital," Journal of Political Economy, University of Chicago Press, vol. 77(4), pages 665-683, Part II, .
    11. Bipasa Datta & Huw D. Dixon, 2002. "Technological Change, Entry and Stock Market Dynamics: An Analysis of Transition in a Monopolistic Economy," CESifo Working Paper Series 641, CESifo Group Munich.
    12. Novshek, William & Sonnenschein, Hugo, 1987. "General Equilibrium with Free Entry: A Synthetic Approach to the Theory of Perfect Competition," Journal of Economic Literature, American Economic Association, pages 1281-1306.
    13. M. G. Myers & E. R. Weintraub, 1971. "A Dynamic Model of Firm Entry," Review of Economic Studies, Oxford University Press, vol. 38(1), pages 127-129.
    14. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    15. Bipasa Datta & Huw Dixon, 2002. "Technological Change, Entry, and Stock-Market Dynamics: An Analysis of Transition in a Monopolistic Industry," American Economic Review, American Economic Association, pages 231-235.
    16. Marta Aloi & Huw Dixon, "undated". "Entry Dynamics, Capacity Utilisation and Productivity in a Dynamic Open Economy," Discussion Papers 02/05, Department of Economics, University of York.
    17. Hornstein, Andreas, 1993. "Monopolistic competition, increasing returns to scale, and the importance of productivity shocks," Journal of Monetary Economics, Elsevier, pages 299-316.
    18. E. P. Howrey & R. E. Quandt, 1968. "The Dynamics of the Number of Firms in an Industry," Review of Economic Studies, Oxford University Press, vol. 35(3), pages 349-353.
    19. Gort, Michael & Klepper, Steven, 1982. "Time Paths in the Diffusion of Product Innovations," Economic Journal, Royal Economic Society, vol. 92(367), pages 630-653, September.
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    Cited by:

    1. Brito, Paulo & Dixon, Huw, 2013. "Fiscal policy, entry and capital accumulation: Hump-shaped responses," Journal of Economic Dynamics and Control, Elsevier, vol. 37(10), pages 2123-2155.
    2. Pedro Mazeda Gil & André Almeida, & Sofia B.S.D. Castro,, 2015. "Flexible Transitional Dynamics in a Non-Scale Fully Endogenous Growth Model," CEF.UP Working Papers 1503, Universidade do Porto, Faculdade de Economia do Porto.
    3. Gómez, Manuel A. & Sequeira, Tiago N., 2013. "Optimal R&D subsidies in a model with physical capital, human capital and varieties," Economic Modelling, Elsevier, vol. 30(C), pages 217-224.
    4. Martin Paldam & Erich Gundlach, 2013. "The religious transition. A long-run perspective," Public Choice, Springer, pages 105-123.
    5. Pedro Rui Mazeda Gil & Paulo Brito & Óscar Afonso, 2008. "A Model of Quality Ladders with Horizontal Entry," FEP Working Papers 296, Universidade do Porto, Faculdade de Economia do Porto.
    6. Brito, Paulo B. & Costa, Luís F. & Dixon, Huw, 2013. "Non-smooth dynamics and multiple equilibria in a Cournot–Ramsey model with endogenous markups," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2287-2306.
    7. Pedro Gil, 2013. "Animal spirits and the composition of innovation in a lab-equipment R&D model with transition," Journal of Economics, Springer, pages 1-33.

    More about this item

    Keywords

    Entry; dynamics; Ramsey;

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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