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Industry Dynamics, Investment and Business Cycles

  • Julieta Caunedo

    (Washington University in St. Louis)

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    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://www.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
    Contact details of provider: Postal:
    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. Matias Busso & Lucia Madrigal & Carmen Pages-Serra, 2012. "Productivity and Resource Misallocation in Latin America," Research Department Publications 4753, Inter-American Development Bank, Research Department.
    2. Chang-Tai Hsieh & Peter Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," Working Papers 09-04, Center for Economic Studies, U.S. Census Bureau.
    3. Jovanovic, B., 1998. "Vintage Capital and Equality," Working Papers 98-16, C.V. Starr Center for Applied Economics, New York University.
    4. Bilbiie, Florin O. & Ghironi, Fabio & Melitz, Marc J., 2012. "Endogenous Entry, Product Variety, and Business Cycles," Scholarly Articles 10914281, Harvard University Department of Economics.
    5. repec:fth:starer:9816 is not listed on IDEAS
    6. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
    7. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474.
    8. Marcelo L. Veracierto, 2002. "Plant-Level Irreversible Investment and Equilibrium Business Cycles," American Economic Review, American Economic Association, vol. 92(1), pages 181-197, March.
    9. repec:fth:starer:98-16 is not listed on IDEAS
    10. Marcela Eslava & John C. Haltiwanger & Adriana D. Kugler & Maurice Kugler, 2009. "Trade Reforms and Market Selection: Evidence from Manufacturing Plants in Colombia," NBER Working Papers 14935, National Bureau of Economic Research, Inc.
    11. George Alessandria & Horag Choi, 2005. "Do sunk costs of exporting matter for net export dynamics?," Working Papers 05-20, Federal Reserve Bank of Philadelphia.
    12. Moscarini, Giuseppe & Postel-Vinay, Fabien, 2009. "Large Employers Are More Cyclically Sensitive," CEPR Discussion Papers 7173, C.E.P.R. Discussion Papers.
    13. Yoonsoo Lee & Toshihiko Mukoyama, 2008. "Entry, Exit, and Plant-Level Dynamics over the Business Cycle," Working Papers 08-17, Center for Economic Studies, U.S. Census Bureau.
    14. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-81, September.
    15. Mas-Colell, Andreu, 1977. "Indivisible commodities and general equilibrium theory," Journal of Economic Theory, Elsevier, vol. 16(2), pages 443-456, December.
    16. Décamps, Jean-Paul & Mariotti, Thomas & Villeneuve, Stéphane, 2003. "Irreversible Investment in Alternative Projects," IDEI Working Papers 193, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jul 2004.
    17. repec:oup:restud:v:61:y:1994:i:2:p:223-46 is not listed on IDEAS
    18. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1403-1448.
    19. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
    20. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
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