Firm dynamics and the macroeconomy

• Main Author: Savagar, Anthony
• Published: Cardiff University 2016
• Subjects: 339; HB Economic Theory
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.685531

The thesis investigates how firm entry and exit into industry influences macroeconomic productivity. The first contribution is to show that firm entry and exit dynamics cause endogenous productivity movements over the business cycle due to the slow response of incumbent firms to macroeconomic conditions. The second contribution is to show that these productivity effects persist into the long run because of firm dynamics’ effect on industry competition. Therefore the thesis argues that slow firm responses cause amplified productivity effects in the short run and that these effects can persist into the long run. A key distinction of the research is to develop an analytically tractable dynamic general equilibrium model. This provides a precise explanation of productivity movements, without using numerical simulation. A crucial feature of the modelling is that firm dynamics have a time-to-build lag, so entry and exit are noninstantaneous. This causes a short-run period during which shocks to the economy are borne by inert incumbent firms and this is responsible for amplified short-run productivity effects. However, over time firms are able to enter and exit which ameliorates the amplification effect. Thus this process alone does not explain persistent effects on productivity. In order to understand persistent effects, the thesis explains that one must consider the effect of entry and exit on the competitive pressure of incumbents. When this is taken into account it shows that firms change their pricing behaviour in response to entry and exit, and the result is that long-run pricing markups change which in turn affect long-run productivity. Chapter 1 demonstrates the empirical relevance of the relationship between productivity, firm entry and output in US data. Chapter 2 develops a structural model to explain shortrun movements in productivity and firm dynamics. Developing chapter 2, chapter 3 explains the long-run effect of firm dynamics on productivity through entry’s effect on competition.