The Effect of Firm Entry on Capacity Utilization and Macroeconomic Productivity
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This paper argues that firm entry causes endogenous fluctuations in macroeconomic productivity through its effect on incumbent firms’ capacity utilization. The analysis shows that imperfect competition causes long-run excess entry leading to many small firms each with excess capacity. Since entry occurs slowly, macroeconomic shocks are initially borne by these incumbents who respond by altering their capacity utilization. As they vary utilization efficiency changes because of non-constant returns to scale and this aggregates to affect the economy’s productivity. In the long run, entry occurs and new firms dissipate the shock, which alleviates incumbents’ alteration in capacity. Therefore the endogenous productivity effect is temporary.Keywords:
Capacity utilization
Imperfect competition
Returns to scale
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I study the joint determination of market structure and growth in an oligopolistic economy. Firms run in-house R&D programs to produce over time a continuous flow of cost-reducing (incremental) innovations. In symmetric equilibrium, the dispersion of resources across firms prevents the exploitation of scale economies in R&D and slows down growth. In free-entry equilibrium, the number of firms changes with market and technological conditions and is endogenous. In particular, R&D spending is a (fixed) sunk cost and there is a negative feed-back of the rate of growth on the number of firms. The explicit consideration of the interdependence of market structure and growth produces novel results. The comparative statics effects of many parameters are no longer those predicted by conventional wisdom. For example, I find negative effects of population size and R&D productivity on growth. The key to these results is a fundamental trade-off between growth and variety, between the rate of growth of consumption of each product and the number of products. Firms do not internalize this trade-off and the market grows faster and supplies less variety than is optimal. Taxes and subsidies bring Pareto efficiency.
Free entry
Comparative statics
Endogenous growth theory
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ABSTRACT The purpose of this paper is to incorporate free entry into the Kaleckian model. To this end, we consider a model with monopolistic competition, mark‐up pricing and a free‐entry condition. Using this model, the Kaleckian model is unstable under a wage‐led growth regime, and it is stable under a profit‐led growth regime, when the interest rate is supposed to be constant. Stability under a wage‐led growth can be achieved if the interest rate is allowed to respond positively to capacity utilization. We also find that a goods market policy, but not an income distribution policy, is then effective from an economic growth perspective.
Monopolistic competition
Capacity utilization
Free entry
Endogenous growth theory
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Endogenous growth theory
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Endogenous growth theory
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This paper examines the impact of cycles on long-term growth in the presence of entry and exit of firms It is argued that whereas mild fluctuations may be beneficial for growth, more severe fluctuations will be detrimental for growth The essential point is whether recessions go beyond the point that triggers (large-scale) exit of firms Mild fluctuations may have a positive effect through the intertemporal substitution between production and productivity improving activities Severe fluctuations, however, which lead to exit of firms, cause losses of knowledge and skills during recessions, and are therefore bad for long-term growth
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A growing body of empirical research highlights substantial changes in the US economy during the last three decades. Business dynamism is declining, market power seems to be on the rise, and aggregate productivity growth is sluggish. We show analytically that a decline in the rate of growth of the labor force implies all of these features in a frontier model of firm dynamics. The reason is that a decline in labor force growth reduces the long-run entry rate but keeps expansion incentives of incumbent firms unchanged. This implies that lower labor force growth reduces creative destruction, increases average firm size and raises market power. We calibrate the model to data on employment and sales for the universe of firms in the U.S. Census. We find that the empirically observed decline in the rate of labor growth since the 1980s can account for the decline in entry and the increase in firm size, generates quantitatively significant and welfare-relevant changes in markups, but plays a minimal role in explaining the decline in aggregate productivity growth.
Dynamism
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Markups vary systematically across firms and are a source of misallocation. This paper develops a tractable model of firm dynamics where firms' market power is endogenous and the distribution of markups emerges as an equilibrium outcome. Monopoly power is the result of a process of forward‐looking, risky accumulation: firms invest in productivity growth to increase markups in their existing products but are stochastically replaced by more efficient competitors. Creative destruction therefore has pro‐competitive effects because faster churn gives firms less time to accumulate market power. In an application to firm‐level data from Indonesia, the model predicts that, relative to the United States, misallocation is more severe and firms are substantially smaller. To explain these patterns, the model suggests an important role for frictions that prevent existing firms from entering new markets. Differences in entry costs for new firms are less important.
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Endogenous growth theory
Creative destruction
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This paper studies the role of rms' entry and exit for business cycle dynamics in an environment, where physical capital is partially sunk. Extending a heterogeneous- rm model a la Hopenhayn (1992) by aggregate productivity shocks and partially irreversible investment yields substantial endogenous ampli cation and propagation. A positive aggregate productivity shock increases the number of entrants and their initial investment levels, because the expected entry value outweighs the implicit sunk cost associated with investment irreversibility. The endogenous propagation of an exogenous stimulus arises via a built-in selection device, as the production growth of new businesses over their lifecycle exceeds the decay due to exits of the least productive rms.
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Tobin's q
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In this paper, we use a simple endogenous growth model to show how a financial crisis might have a permanent effect on the level of total factor productivity (TFP). In the model, a financial shock leads to a rise in the spread between the rate of interest paid by firms and the risk-free rate. Since firms have to borrow to finance their research and development (R&D) spending, such a rise in the spread leads to a fall in R&D spending, which affects innovation and, hence, reduces TFP growth. In turn, this leads to permanent falls in the levels of output and labour productivity.
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