Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/189923
Authors: 
Savagar, Anthony
Year of Publication: 
2018
Series/Report no.: 
School of Economics Discussion Papers 1812
Abstract: 
I develop a model of dynamic firm entry, oligopolistic competition and returns to scale in order to decompose TFP fluctuations into technical change, economic profit and markup fluctuations. I show that economic profits cause short-run upward bias in measured TFP, but this subsides to upward bias from endogenous markups as firm entry adjusts. I analyze dynamics analytically through a nonparametric DGE model that allows for a perfect competition equilibrium such that there are no biases in measured TFP. Given market power, simulations show that measured TFP is 40% higher than technology in the short-run, due solely to profits, and 20% higher in the long-run due solely to markups. During transition both effects contribute upward bias: initially the profit effect dominates, but by 5 quarters the two effects contribute equally, and by 10 quarters only the markup effect persists. The speed of firm adjustment ("business dynamism") will determine these timings and therefore the importance of each bias.
Subjects: 
Endogenous Markups
Dynamic Firm Entry
Endogenous Productivity
Endogenous Entry Costs
JEL: 
E32
D21
D43
L13
C62
Document Type: 
Working Paper
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