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The Macroeconomic Implications of Firm Selection

Author

Listed:
  • Dudley Cooke

    (Department of Economics, University of Exeter)

  • Tatiana Damjanovic

    (Department of Economics, Durham University)

Abstract

This paper studies the macroeconomic implications of firm selection in a model with monopolistic competition and translog preferences. Firm selection magnifies the impact of aggregate technology shocks. Magni cation is limited by diminishing returns to new varieties and misallocation. We provide analytical results linking selection, diminishing returns, and misallocation with measured total factor productivity (TFP) and the distribution of firm-level productivity. A calibrated version of our model suggests the contribution of firm selection to variations in TFP is over 20 percent.

Suggested Citation

  • Dudley Cooke & Tatiana Damjanovic, 2017. "The Macroeconomic Implications of Firm Selection," Discussion Papers 1709, University of Exeter, Department of Economics.
    • Handle: RePEc:exe:wpaper:1709
    as

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    File URL: https://exetereconomics.github.io/RePEc/dpapers/DP1709.pdf
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    References listed on IDEAS

    as
    1. Feenstra, Robert C., 2018. "Restoring the product variety and pro-competitive gains from trade with heterogeneous firms and bounded productivity," Journal of International Economics, Elsevier, vol. 110(C), pages 16-27.
    2. Pierre‐Philippe Combes & Gilles Duranton & Laurent Gobillon & Diego Puga & Sébastien Roux, 2012. "The Productivity Advantages of Large Cities: Distinguishing Agglomeration From Firm Selection," Econometrica, Econometric Society, vol. 80(6), pages 2543-2594, November.
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    6. Bergin, Paul R. & Feenstra, Robert C., 2000. "Staggered price setting, translog preferences, and endogenous persistence," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 657-680, June.
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    9. Minniti, Antonio & Turino, Francesco, 2013. "Multi-product firms and business cycle dynamics," European Economic Review, Elsevier, vol. 57(C), pages 75-97.
    10. Costas Arkolakis & Arnaud Costinot & Dave Donaldson & Andrés Rodríguez-Clare, 2019. "The Elusive Pro-Competitive Effects of Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(1), pages 46-80.
    11. Lewis, Vivien & Poilly, Céline, 2012. "Firm entry, markups and the monetary transmission mechanism," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 670-685.
    12. Sungki Hong, 2017. "Customer Capital, Markup Cyclicality, and Amplification," Working Papers 2017-33, Federal Reserve Bank of St. Louis.
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    More about this item

    Keywords

    Firm Selection; Translog Preferences; Productivity Distribution;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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