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Industry Dynamics, Investment and Business Cycles

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  • Julieta Caunedo

    (Washington University in St. Louis)

Abstract

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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  • Julieta Caunedo, 2013. "Industry Dynamics, Investment and Business Cycles," 2013 Meeting Papers 1078, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:1078
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    References listed on IDEAS

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    Cited by:

    1. Julieta Caunedo, 2017. "Efficiency with Equilibrium Marginal Product Dispersion and Firm Selection," 2017 Meeting Papers 1541, Society for Economic Dynamics.

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