Creator: Klette, Tor Jakob and Kortum, Samuel Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 300 Abstract:
We develop a parsimonious model of innovating firms rich enough to confront firm-level evidence. It captures the dynamic behavior of individual heterogenous firms, describes the evolution of an industry with simultaneous entry and exit, and delivers a general equilibrium model of technological change. While unifying the theoretical analysis of firms, industries, and the aggregate economy, the model yields insights into empirical work on innovating firms. It accounts for the persistence over time of firms’ R&D investment, the concentration of R&D among incumbent firms, and the link between R&D and patenting. Furthermore, it explains why R&D as a fraction of revenues is strongly related to firm productivity yet largely unrelated to firm size or growth.
Keyword: Birth and death processes, Productivity, Market structure, Firm growth, Endogenous growth theory, and R&D Subject (JEL): O31 - Innovation and Invention: Processes and Incentives and L11 - Production, Pricing, and Market Structure; Size Distribution of Firms
Creator: Mercenier, Jean and Schmitt, Nicolas Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 188 Abstract:
We argue that the rationalization gains often predicted by static applied general equilibrium models with imperfect competition and scale economies are artificially boosted by an unrealistic treatment of fixed costs. We introduce sunk costs into one such model calibrated with real-world data. We show how this changes the oligopoly game in a way significant enough to affect, both qualitatively and quantitatively, the outcome of a trade liberalization exercise.
Keyword: Applied general equilibrium, Sunk costs, Market structure, and Trade liberalization Subject (JEL): D58 - Computable and Other Applied General Equilibrium Models, F17 - Trade: Forecasting and Simulation, F12 - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation, and C68 - Computable General Equilibrium Models