School of Economics

Macroeconomics, Growth and History Centre (MaGHiC)


About the Centre

The Macroeconomics, Growth and History Centre (MaGHiC) is the focal point for macroeconomic research, events and PhD training at the University of Kent. The research interests of the group span macroeconomic theory, empirical macroeconomics, macroeconometrics and the macroeconomic analysis of historical data. The Centre has strengths in growth, structural change, computational economics, firm dynamics and macroeconomic history.

Researchers within the Centre have published articles in leading international journals including the American Economic Review, the Review of Economic Studies, the Journal of The European Economic Association, the Economic Journal, the American Economic Journal: Macroeconomics, the Review of Economic Dynamics, the Journal of Econometrics and many others.

Tree Rings

Firm Dynamics, Dynamic Reallocation, Variable Markups and Productivity Behaviour

6 September 2017

An Article Image

by Anthony Savagar, discussion paper KDPE 1713, August 2017.

Non-technical summary:

Traditionally macroeconomists assume that the number of firms in an economy adjusts instantaneously to arbitrage profits. This assumption ignores ‘slow’ fluctuations in firm entry and exit over the business cycle. This paper develops a model of firm dynamics in the macroeconomy with sunk costs that cause firms to respond slowly to economic shocks, hence entry and exit decisions are non-instantaneous. The resulting firm adjustment towards zero profit causes endogenous fluctuations in profits, competition and business allocation that helps to explain business cycle productivity dynamics.

The paper studies how firm entry determines macroeconomic productivity through division of resources and competitive pressure on markups. Recent research examines the importance of firm entry for macroeconomic productivity, but the arguments focus on instantaneous firm entry. I argue that this overlooks the changing allocation of business as firms adjust intertemporally. My contribution is to combine this dynamic firm entry with endogenous markups (markups determined by competition). The result is a new trade-off: an exiter reduces industry competition which reduces incumbents’ productivity, but exit reallocates business to incumbents who improve productivity through better returns to scale (vice-versa for entry which raises competition, but steals business reducing scale). The mechanism helps to clarify productivity puzzles. It explains that economic shocks cause exacerbated productivity responses that weaken as firms adjust, and entry/exit effects on competition prevent reversion to previous long-run outcomes.

The main finding is that firm competition from entry ameliorates short-run productivity volatility but in the long run productivity effects persist because of structural changes to competition.

You can download the complete paper here.

 

 

School of Economics, Keynes College, University of Kent, Canterbury, Kent, CT2 7NP

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Last Updated: 20/03/2019