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Firm Dynamics in the Neoclassical Growth Model

Author

Listed:
  • Omar Licandro
Abstract
This paper integrates firm dynamics theory into the Neoclassical growth framework. It embeds selection into an otherwise standard dynamic general equilibrium model of one good, two production factors (capital and labor) and competitive markets. Selection relies on firm specific investment: i) capital is a fixed production factor {an entry cost, ii) the productivity of capital is firm specific, but observed after investment, iii) firm specific capital is partially reversible {its opportunity cost plays the same role as fixed production costs. At equilibrium, aggregate technology is Neoclassical, but TFP is endogenous and positively related to selection; capital depreciation positively depends on selection too, due to capital irreversibility. The Neoclassical model is the limit case of homogeneous firms. At steady state, output per capita and welfare both raise with selection. Rendering capital more reversible or increasing the variance of the idiosyncratic shock both raise selection, productivity, output per capita and welfare.

Suggested Citation

  • Omar Licandro, 2015. "Firm Dynamics in the Neoclassical Growth Model," Discussion Papers 2015/17, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    • Handle: RePEc:not:notcfc:15/17
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    File URL: https://www.nottingham.ac.uk/cfcm/documents/papers/cfcm-2015-17.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Firm dynamics; Selection; Neoclassical Growth model; Scrapping; Capital irreversibility;
    All these keywords.

    JEL classification:

    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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