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

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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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2007/16.

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Length: 60 pages
Date of creation: Jun 2007
Date of revision: Oct 2007
Publication status: Published in International Journal of Economic Theory, , 5, 333-357
Handle: RePEc:cdf:wpaper:2007/16
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  1. Marta Aloi & Huw D. Dixon, 2002. "Entry Dynamics, Capacity Utilisation and Productivity in a Dynamic Open Economy," CESifo Working Paper Series 716, CESifo Group Munich.
  2. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
  3. Novshek, William & Sonnenschein, Hugo., 1983. "General Equilibrium with Free Entry: A Synthetic Approach to the Theory of Perfect Competition," Working Papers 497, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. 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 659-96, August.
  5. 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.
  6. 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.
  7. 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.
  8. 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 665-83, Part II, .
  9. 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.
  10. Smith, Vernon L., . "Optimal Costly Firm Entry in General Equilibrium," Working Papers 40, California Institute of Technology, Division of the Humanities and Social Sciences.
  11. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, number 9780521331586, June.
  12. 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, vol. 92(2), pages 231-235, May.
  13. Koji Okuguchi, 1972. "A Dynamic Model of Firm Entry: Comment," Review of Economic Studies, Oxford University Press, vol. 39(4), pages 521-522.
  14. Hornstein, Andreas, 1993. "Monopolistic competition, increasing returns to scale, and the importance of productivity shocks," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 299-316, June.
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