The neoclassical model and the welfare costs of selection

Fabrice Collard () and Omar Licandro
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Fabrice Collard: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - Comue de Toulouse - Communauté d'universités et établissements de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CNRS - Centre National de la Recherche Scientifique
Omar Licandro: University of Leicester, BSE, Barcelona

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Abstract: This paper embeds firm dynamics into the Neoclassical model in a framework with partially reversible capital and investment distortions, allowing for a simple characterization of the transitional dynamics of economies moving towards greater selection. At equilibrium, aggregate technology is Neoclassical, with the quality of capital and the depreciation rate depending on selection. As investment distortions are corrected, selection increases, and both output per capita and welfare rise at the steady state. However, selection destroys existing production capacities, leading to transitional welfare losses. When calibrated to the US, the model shows that developing countries reducing investment distortions to US levels would experience substantial steady-state welfare gains, though transitional costs could absorb 70% to 76% of these gains. While the associated welfare gains from selection at steady-state are significant, between 10% and 23%, transitional costs largely offset these additional welfare gains.

Keywords: Welfare gains; Transitional dynamics; Investment distortions; Capital irreversibility; Neoclassical model; Firm dynamics and selection (search for similar items in EconPapers)
Date: 2025-07
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Published in Review of Economic Dynamics, 2025, 57, pp.101284. ⟨10.1016/j.red.2025.101284⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05279435

DOI: 10.1016/j.red.2025.101284

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