Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/245430 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 9249
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper embeds firm dynamics into the Neoclassical model and provides a simple framework to solve for the transitional dynamics of economies moving towards more selection. 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, the selection process generates transitional welfare losses that may reduce in around 60% long term (consumption equivalent) welfare gains. The same property is shown to be true in a standard general equilibrium model with entry and fixed production costs.
Subjects: 
firm dynamics and selection
neoclassical model
capital irreversibility
investment distortions
transitional dynamics
welfare gains
JEL: 
E13
E23
D60
O40
Document Type: 
Working Paper
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