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Firm Dynamics in the Neoclassical Growth Model

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  • Licandro, Omar

Abstract

This paper integrates firm dynamics theory into the Neoclassical growth framework. It embeds selection into an otherwise standard dynamic general equilibrium model of one good, two production factors (capital and labor) and competitive markets. Selection relies on firm specific investment: i) capital is a fixed production factor --playing the role of an entry cost, ii) the productivity of capital is firm specific, but observed after investment, iii) firm specific capital is partially reversible --its opportunity cost plays the same role as fixed production costs. At equilibrium, aggregate technology is Neoclassical, but the average quality of capital is endogenous and positively related to selection; due to capital irreversibility, the marginal product of capital is larger than the user cost and capital depreciation positively depends on selection. At steady state, output per capita and welfare both raise with selection; rendering capital more reversible or increasing the variance of the idiosyncratic shock both raise selection, productivity, output per capita and welfare.

Suggested Citation

  • Licandro, Omar, 2016. "Firm Dynamics in the Neoclassical Growth Model," CEPR Discussion Papers 11593, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11593
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    References listed on IDEAS

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    1. Raouf Boucekkine & Fernando Del Río & Omar Licandro, 2003. "Embodied Technological Change, Learning‐by‐doing and the Productivity Slowdown," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(1), pages 87-98, March.
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    3. repec:ucp:bknber:9780226304557 is not listed on IDEAS
    4. Jones, Larry E. & Manuelli, Rodolfo E., 1997. "The sources of growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 75-114, January.
    5. Boucekkine, Raouf & del Rio, Fernando & Licandro, Omar, 2005. "Obsolescence and modernization in the growth process," Journal of Development Economics, Elsevier, vol. 77(1), pages 153-171, June.
    6. Diamond, Peter A. & Stiglitz, Joseph E., 1974. "Increases in risk and in risk aversion," Journal of Economic Theory, Elsevier, vol. 8(3), pages 337-360, July.
    7. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 65-94.
    8. Boucekkine, Raouf & Germain, Marc & Licandro, Omar, 1997. "Replacement Echoes in the Vintage Capital Growth Model," Journal of Economic Theory, Elsevier, vol. 74(2), pages 333-348, June.
    9. Hugo A. Hopenhayn, 2014. "Firms, Misallocation, and Aggregate Productivity: A Review," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 735-770, August.
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    19. Alain Gabler & Omar Licandro, "undated". "Firm Dynamics and the Importance of the Embodied Question," Working Papers 397, Barcelona School of Economics.
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    More about this item

    Keywords

    Capital irreversibility; Entry and Exit; Firm Dynamics; Hopenhayn; Neoclassical growth model; Ramsey; selection;
    All these keywords.

    JEL classification:

    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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