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The Effect of Firm Entry on Capacity Utilization and Macroeconomic Productivity

Huw Dixon () and Anthony Savagar

No 1130, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: 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.

New Economics Papers: this item is included in nep-dge, nep-eff, nep-ent, nep-mac and nep-sbm
Date: 2017
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Working Paper: Firm Entry, Excess Capacity and Aggregate Productivity (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1130

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