Industry dynamics with stochastic demand
Research output: Journal Publications and Reviews (RGC: 21, 22, 62) › 21_Publication in refereed journal › Not applicable › peer-review
|Journal / Publication||RAND Journal of Economics|
|Early online date||16 Sep 2008|
|Publication status||Published - 2008|
|Link to Scopus||https://www.scopus.com/record/display.uri?eid=2-s2.0-44249107090&origin=recordpage|
We study the dynamics of an industry subject to aggregate demand shocks -where the productivity of a firm's technology evolves stochastically over time. To characterize the intertemporal evolution of the distribution of firms, we discuss in particular how exit decisions, aggregate output, profits, and distributions of firm productivities vary (a) across different demand realization paths; (b) along a demand history path, detailing the effects of continued good or bad market conditions; and (c) for different anticipated future market conditions. We show how poor demand conditions can lead to increased exit of low-productivity firms at all future dates and states and raise welfare due to the impact on exit decisions.