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Industry Dynamics, Investment and Business Cycles

  • Julieta Caunedo

    (Washington University in St. Louis)

This paper investigates how features of the business cycle interact with technological restrictions at the firm level to generate dispersion in marginal products of ex ante identical firms. The model is able to deliver a non-monotonic relationship between dispersion in marginal products, aggregate productivity and the features of the business cycle. When aggregate uncertainty is low and dispersion in marginal products is low, aggregate productivity is high. But when aggregate uncertainty is high, aggregate productivity is low, and the allocation can be consistent with low dispersion in marginal products. These two alternative economies differ in their underlying industry dynamic. Hence, dispersion is an imperfect statistic of aggregate productivity in the model. Allocations are typically non efficient due to imperfect competition and non-convexities in production. I study the properties of the optimal industrial policy. In general, the efficient allocation does not dictate equalization of capital labor ratios across all firms. Allocations are dynamically optimal so there is no room for further reallocation.

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File URL: https://economicdynamics.org/meetpapers/2013/paper_1078.pdf
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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 1078.

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Date of creation: 2013
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Handle: RePEc:red:sed013:1078
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Giuseppe Moscarini & Fabien Postel-Vinay, 2009. "Large Employers Are More Cyclically Sensitive," Bristol Economics Discussion Papers 09/609, Department of Economics, University of Bristol, UK.
  2. Giuseppe Bertola & Ricardo J. Caballero, 1991. "Irreversibility and Aggregate Investment," NBER Working Papers 3865, National Bureau of Economic Research, Inc.
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  15. Gertler, Mark & Gilchrist, Simon, 1993. "The cyclical behavior of short-term business lending: Implications for financial propagation mechanisms," European Economic Review, Elsevier, vol. 37(2-3), pages 623-631, April.
  16. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Misallocation and Manufacturing TFP in China and India," NBER Working Papers 13290, National Bureau of Economic Research, Inc.
  17. Mas-Colell, Andreu, 1977. "Indivisible commodities and general equilibrium theory," Journal of Economic Theory, Elsevier, vol. 16(2), pages 443-456, December.
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  19. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
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