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The neoclassical model and the welfare costs of selection

Author

Listed:
  • Fabrice Collard
  • Omar Licandro
Abstract
This paper embeds firm dynamics into the Neoclassical model and provides a simple framework to evaluate the welfare cost of selection in the transition to steady state. As in the Neoclassical model, markets are perfectly competitive, there is only one good and two production factors (capital and labor). At equilibrium, aggregate technology is Neoclassical, but the average quality of capital and the depreciation rate are both endogenous and positively related to selection. At steady state, output per capita and welfare both raise with selection. However, initial capital destruction due to selection generates transitional welfare losses that may reduce in around 85% long term welfare gains. The same property is shown to be true in a standard general equilibrium model with entry and fixed production costs.

Suggested Citation

  • Fabrice Collard & Omar Licandro, 2020. "The neoclassical model and the welfare costs of selection," Discussion Papers 2020/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    • Handle: RePEc:not:notcfc:2020/03
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Neoclassical Model and the Welfare Costs of Selection
      by Christian Zimmermann in NEP-DGE blog on 2021-09-16 17:22:47
    2. The Neoclassical Model and the Welfare Costs of Selection
      by Christian Zimmermann in NEP-DGE blog on 2021-10-08 15:07:30

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    1. Andrea Lanteri & Pamela Medina & Eugene Tan, 2023. "Capital-Reallocation Frictions and Trade Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(2), pages 190-228, April.

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    More about this item

    Keywords

    Firm dynamics; Entry and exit; Selection; Neoclassical model; Ramsey; Hopenhayn; Scrapping; Capital irreversibility; Investment distortions; Transitional dynamics; Welfare gains;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • D6 - Microeconomics - - Welfare Economics
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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