An Alternative Theory of Firm and Industry Dynamics

Richard Ericson and Ariel Pakes
Additional contact information
Richard Ericson: Columbia University

No 1041, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper provides a model of firm and industry dynamics that allows for entry, exit and firm-specific uncertainty generating variability in the fortunes of firms. It focuses on the impact of uncertainty arising from investment in research and exploration-type processes. It analyzes the behavior of individual firms exploring profit opportunities in an evolving marketplace and derives optimal policies, including exit, in this environment. Then it adds an entry process and aggregates the optimal behavior of all firms, including potential entrants, into a rational expectations, Markov perfect industry equilibrium, and proves ergodicity of the equilibrium process. Numerical examples are used to illustrate the more detailed characteristics of the stochastic process generating industry structures that result from this equilibrium.

Keywords: Industry dynamics; exploratory investment; heterogeneous firms; Markov perfect equilibrium (search for similar items in EconPapers)
JEL-codes: C73 D40 D92 L11 (search for similar items in EconPapers)
Pages: 69 pages
Date: 1992-12
References: Add references at CitEc
Citations: View citations in EconPapers (31)

Published in Journal of Economic Theory (1998), 79(1): 1-46

Downloads: (external link)
https://cowles.yale.edu/sites/default/files/files/pub/d10/d1041.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cwl:cwldpp:1041

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University Yale University, Box 208281, New Haven, CT 06520-8281 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Brittany Ladd ().