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Firm entry, excess capacity and endogenous productivity

Savagar, Anthony and Dixon, Huw 2020. Firm entry, excess capacity and endogenous productivity. European Economic Review 121 , 103339. 10.1016/j.euroecorev.2019.103339
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We show that sluggish firm entry causes productivity to vary endogenously in response to technology shocks. The endogenous productivity effect is caused by incumbent firms utilizing excess capacity as entry adjusts. We develop a nonparametric model of endogenous sunk costs and monopolistic competition to show that imperfect competition and dynamic entry are necessary and jointly sufficient conditions for endogenous productivity fluctuations. Quantitatively we show the endogenous productivity effect is as large as that from a traditional ‘capital utilization’ effect.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Publisher: Elsevier
ISSN: 0014-2921
Date of First Compliant Deposit: 18 January 2021
Date of Acceptance: 30 October 2019
Last Modified: 23 Feb 2021 15:30

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