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Firm Tunrover and the Rate of Macroeconomic Growth - Simulating the Macroeconomic Effects of Schumpeterian Creative Destruction

The positive effects of new innovative entry and fast and efficient allocation of resources are balanced against the efficiency of price signaling in markets in a non-linear micro based simulation model of an Experimentally Organized Economy (EOE). In this model increasingly rapid reallocation of resources over markets, moved by innovative new entry and competitive exit (the rate of firm turnover) generates faster growth in output, but eventually, if too fast, is shown to affect the reliability of price signaling in markets and to raise the frequency of investment mistakes. Beyond a certain level of the rate of firm turnover the aggregate effects at the macro level, therefore, turn negative. This optimal growth trajectory depends on the balance between the rates of entry and exit and on the performance of new firms compared to incumbents, their size compared to incumbents and the variation in the same characteristics.

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Paper provided by The Ratio Institute in its series Ratio Working Papers with number 66.

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Length: 31 pages
Date of creation: 18 Jan 2005
Date of revision:
Handle: RePEc:hhs:ratioi:0066
Contact details of provider: Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
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  1. Djankov, Simeon & La Porta, Rafael & Shleifer, Andrei & Lopez de Silanes, Florencio, 2001. "The regulation of entry," Policy Research Working Paper Series 2661, The World Bank.
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  4. Dasgupta, Partha & Stiglitz, Joseph, 1981. "Entry, innovation, exit : Towards a dynamic theory of oligopolistic industrial structure," European Economic Review, Elsevier, vol. 15(2), pages 137-158.
  5. Mata, Jose & Portugal, Pedro & Guimaraes, Paulo, 1995. "The survival of new plants: Start-up conditions and post-entry evolution," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 459-481, December.
  6. Timothy Dunne & Shawn D. Klimek & Mark J. Roberts, 2003. "Entrant Experience and Plant Exit," NBER Working Papers 10133, National Bureau of Economic Research, Inc.
  7. Philippe Aghion & Peter Howitt, 1990. "A Model of Growth Through Creative Destruction," NBER Working Papers 3223, National Bureau of Economic Research, Inc.
  8. Baldwin, John R. & Gorecki, Paul K., 1987. "Plant creation versus plant acquisition : The entry process in canadian manufacturing," International Journal of Industrial Organization, Elsevier, vol. 5(1), pages 27-41, March.
  9. Douglass C. North & Robert Paul Thomas, 1970. "An Economic Theory of the Growth of the Western World," Economic History Review, Economic History Society, vol. 23(1), pages 1-17, 04.
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  12. Brito, Paulo & Mello, Antonio S., 1995. "Financial constraints and firm post-entry performance," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 543-565, December.
  13. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  14. Sidney G. Winter, 1964. "Economic "Natural Selection" and the Theory of the Firm," LEM Chapters Series, in: Yale Economic Essays, pages 225-272 Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  15. Eliasson, Gunnar & Johansson, Dan & Taymaz, Erol, 2004. "Simulating the New Economy," Ratio Working Papers 52, The Ratio Institute.
  16. Audretsch, David B. & Mata, Jose, 1995. "The post-entry performance of firms: Introduction," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 413-419, December.
  17. Boeri, Tito & Bellmann, Lutz, 1995. "Post-entry behaviour and the cycle: Evidence from Germany," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 483-500, December.
  18. Franco Modigliani, 1958. "New Developments on the Oligopoly Front," Journal of Political Economy, University of Chicago Press, vol. 66, pages 215.
  19. Honjo, Yuji, 2000. "Business failure of new firms: an empirical analysis using a multiplicative hazards model," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 557-574, May.
  20. Davidsson, Per & Henrekson, Magnus, 2000. "Determinants of the Prevalence of Start-ups and High-Growth Firms," SSE/EFI Working Paper Series in Economics and Finance 381, Stockholm School of Economics, revised 26 May 2002.
  21. Highfield, Richard & Smiley, Robert, 1987. "New business starts and economic activity : An empirical investigation," International Journal of Industrial Organization, Elsevier, vol. 5(1), pages 51-66, March.
  22. Eliasson, Gunnar, 1977. "Competition and Market Processes in a Simulation Model of the Swedish Economy," American Economic Review, American Economic Association, vol. 67(1), pages 277-81, February.
  23. Masako Ueda, 2000. "Why Do Fast Growing Sectors Not Experience Above-Average Entry of New Firms?," Econometric Society World Congress 2000 Contributed Papers 1316, Econometric Society.
  24. Audretsch, David B., 1995. "Innovation, growth and survival," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 441-457, December.
  25. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  26. Doms, Mark & Dunne, Timothy & Roberts, Mark J., 1995. "The role of technology use in the survival and growth of manufacturing plants," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 523-542, December.
  27. Boyan Jovanovic & Peter L. Rousseau, 2002. "Mergers as Reallocation," NBER Working Papers 9279, National Bureau of Economic Research, Inc.
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