IDEAS home Printed from https://ideas.repec.org/p/sce/scecf1/229.html
   My bibliography  Save this paper

The Complexity of Production, Technological Volatility and Inter-Industry Differences in the Persistence of Profits Above the Norm

Author

Listed:
  • Philip E. Auerswald

Abstract

I present a model of industry dynamics resulting from competition between forward looking, heterogeneous firms that face three simultaneous challenges: learning in the process of production, competing against new entrants able to imitate best practice (albeit imperfectly), and enduring technological setbacks caused by volatility in the external environment. In the first part of the paper I propose a simple but (theoretically and empirically) well-grounded representation of the process of learning by a single plant firm that permits me to parameterize the complexity of production typical of an industry. I define the "complexity of production" as the extent to which a technical decision by one unit within the firm affects the productive efficiency of other units--that is, the magnitude of production "externalities" internal to the firm. Persistent intra-industry differences in firm profitability arise as the outcome of learning and imitation. Inter-industry differences in the persistence of above normal profits arise from production being more technologically complex in some industries than in others. In the second part of the paper I simulate industry evolution resulting from competition between forward looking firms that learn, imitate, and endure technological shocks. The framework is an extension of the Ericson and Pakes (1995) model of Markov-perfect industry dynamics; the implementation builds directly upon Pakes and McGuire (1995). I show that industry dynamics depend crucially on both complexity of production and on technological volatility.

Suggested Citation

  • Philip E. Auerswald, 2001. "The Complexity of Production, Technological Volatility and Inter-Industry Differences in the Persistence of Profits Above the Norm," Computing in Economics and Finance 2001 229, Society for Computational Economics.
  • Handle: RePEc:sce:scecf1:229
    as

    Download full text from publisher

    File URL: http://home.comcast.net/~auerswald/markov/auerswald_complexity-of-production.pdf
    File Function: main text
    Download Restriction: no

    References listed on IDEAS

    as
    1. Bloch, Francis & Ryder, Harl, 2000. "Two-Sided Search, Marriages, and Matchmakers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 93-115, February.
    2. Ondrich, Jan I, 1985. "The Initial Conditions Problem in Work History Data," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 441-421, August.
    3. Boulier, Bryan L & Rosenzweig, Mark R, 1984. "Schooling, Search, and Spouse Selection: Testing Economic Theories of Marriage and Household Behavior," Journal of Political Economy, University of Chicago Press, vol. 92(4), pages 712-732, August.
    4. Bergstrom, Ted & Schoeni, Robert F, 1996. "Income Prospects and Age-at-Marriage," Journal of Population Economics, Springer;European Society for Population Economics, pages 115-130.
    5. Ken Burdett & Melvyn G. Coles, 1997. "Marriage and Class," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 141-168.
    6. Burdett, Kenneth & Coles, Melvyn G, 1999. "Long-Term Partnership Formation: Marriage and Employment," Economic Journal, Royal Economic Society, vol. 109(456), pages 307-334, June.
    7. Roth, Alvin E. & Sotomayor, Marilda, 1992. "Two-sided matching," Handbook of Game Theory with Economic Applications,in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 16, pages 485-541 Elsevier.
    8. Montgomery, Mark R. & Sulak, Donna B., 1989. "Female first marriage in East and Southeast Asia : A Kiefer-Neumann model," Journal of Development Economics, Elsevier, vol. 30(2), pages 225-240, April.
    9. H. Bunzel & Bent Jesper Christensen & Peter Jensen & Nicholas Kiefer & L. Korsholm & L. Muus & G. R. Neumann & Michael Rosholm, 2001. "Specification and Estimation of Equilibrium Search Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 90-126, January.
    10. Bontemps, Christian & Robin, Jean-Marc & Van den Berg, Gerard J, 1999. "An Empirical Equilibrium Job Search Model with Search on the Job and Heterogeneous Workers and Firms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 1039-1074, November.
    11. Duncan, Greg J & Hill, Daniel H, 1989. "Assessing the Quality of Household Panel Data: The Case of the Panel Study of Income Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(4), pages 441-452, October.
    12. Rosen, Sherwin, 1981. "The Economics of Superstars," American Economic Review, American Economic Association, vol. 71(5), pages 845-858, December.
    13. Pencavel, John, 1998. "Assortative Mating by Schooling and the Work Behavior of Wives and Husbands," American Economic Review, American Economic Association, vol. 88(2), pages 326-329, May.
    14. Lones Smith, 2006. "The Marriage Model with Search Frictions," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1124-1146, December.
    15. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 813-846, July-Aug..
    16. Spurr, Stephen J, 1987. "How the Market Solves an Assignment Problem: The Matching of Lawyers with Legal Claims," Journal of Labor Economics, University of Chicago Press, vol. 5(4), pages 502-532, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    complexity of production; innovation; intrafirm externalities; learning by doing; industry dynamics; production recipes; technology;

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sce:scecf1:229. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/sceeeea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.