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The Neoclassical Model and the Welfare Costs of Selection

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  • Collard, Fabrice
  • Licandro, Omar

Abstract

This paper embeds firm dynamics into the Neoclassical model and provides a simple framework to solve for the transitional dynamics of economies moving towards more selection. As in the Neoclassical model, markets are perfectly competitive, there is only one good and two production factors (capital and labor). At equilibrium, aggregate technology is Neoclassical, but the average quality of capital and the depreciation rate are both endogenous and positively related to selection. At steady state, output per capita and welfare both raise with selection. However, the selection process generates transitional welfare losses that may reduce in around 60% long term (consumption equivalent) welfare gains. The same property is shown to be true in a standard general equilibrium model with entry and fixed production costs.

Suggested Citation

  • Collard, Fabrice & Licandro, Omar, 2021. "The Neoclassical Model and the Welfare Costs of Selection," CEPR Discussion Papers 16522, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:16522
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Neoclassical Model and the Welfare Costs of Selection
      by Christian Zimmermann in NEP-DGE blog on 2021-09-16 17:22:47
    2. The Neoclassical Model and the Welfare Costs of Selection
      by Christian Zimmermann in NEP-DGE blog on 2021-10-08 15:07:30

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    1. Andrea Lanteri & Eugene Tan & Pamela Medina, 2019. "Capital-Reallocation Frictions and Trade Shocks," 2019 Meeting Papers 1078, Society for Economic Dynamics.

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    More about this item

    Keywords

    Capital irreversibility; Firm dynamics and selection; Investment distortions; Neoclassical Model; Transitional Dynamics; welfare gains;
    All these keywords.

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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