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.
|Date of creation:||Jun 2007|
|Date of revision:||Oct 2007|
|Publication status:||Published in International Journal of Economic Theory, , 5, 333-357|
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