Industry Dynamics, Investment and Business Cycles

Julieta Caunedo

No 1078, 2013 Meeting Papers from Society for Economic Dynamics

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.

Date: 2013
New Economics Papers: this item is included in nep-bec, nep-dge and nep-tid
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:1078

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