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Creative Destruction in Industries

Author

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  • Boyan Jovanovic
  • Chung-Yi Tse

Abstract

Most industries go through a "shakeout" phase during which the number of producers in the industry declines. Industry output generally continues to rise, however, which implies a reallocation of capacity from exiting firms to incumbents and new entrants. Thus shakeouts seem to be classic creative destruction episodes. Shakeouts of firms tend to occur sooner in industries where technological progress is rapid. Existing models do not explain this. Yet the relation emerges naturally in a vintage-capital model in which shakeouts of firms accompany the replacement of capital, and in which a shakeout is the first replacement echo of the capital created when the industry is born. We fit the model to the Gort-Klepper data and to Agarwal's update of those data.

Suggested Citation

  • Boyan Jovanovic & Chung-Yi Tse, 2006. "Creative Destruction in Industries," NBER Working Papers 12520, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12520
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Roberto M. Samaniego, 2008. "Entry, Exit and Investment-Specific Technical Change, Second Version," PIER Working Paper Archive 09-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 08 Dec 2008.
    2. Aradhna Aggarwal & Takahiro Sato, 2015. "Identifying High Growth Firms in India: An Alternative Approach," Discussion Paper Series DP2015-14, Research Institute for Economics & Business Administration, Kobe University.
    3. Chung-Yi Tse, 2008. "Diffusion with variable production lead times," Journal of Economics, Springer, vol. 93(2), pages 177-202, March.
    4. Zhiguo He & Gregor Matvos, 2012. "Debt and Creative Destruction: Why Could Subsidizing Corporate Debt be Optimal?," NBER Working Papers 17920, National Bureau of Economic Research, Inc.
    5. Flora Bellone & Patrick Musso & Lionel Nesta & Michel Quere, 2010. "Market Selection Along the Firm Life Cycle," Chapters,in: Innovation, Economic Growth and the Firm, chapter 5 Edward Elgar Publishing.
    6. Peter Thompson & Mihaela Pintea, 2008. "Sorting, Selection, and Industry Shakeouts," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 33(1), pages 23-40, August.
    7. Uschi Backes-Gellner & Stephan Veen, 2007. "Aging Workforces and Challenges to Human Resource Management in German Firms," Working Papers 0079, University of Zurich, Institute for Strategy and Business Economics (ISU).
    8. Roberto M. Samaniego, 2010. "Entry, Exit, and Investment-Specific Technical Change," American Economic Review, American Economic Association, vol. 100(1), pages 164-192, March.
    9. Maria José Gil-Moltó & Dimitrios Varvarigos, 2012. "Industry Dynamics and Indeterminacy in an OLG Economy with Endogenous Occupational Choice," Discussion Papers in Economics 12/09, Department of Economics, University of Leicester, revised Sep 2012.
    10. Rui Baptista & Murat Karaoez, 2007. "Turbulence in High Growth and Declining Industries," Jena Economic Research Papers 2007-043, Friedrich-Schiller-University Jena.

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    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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