Collard, Fabrice and Licandro, Omar (2021) The Neoclassical Model and the Welfare Costs of Selection. TSE Working Paper, n. 21-1246, Toulouse

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This paper embeds firm dynamics into the Neoclassical model and provides a simple framework to solve for the transitional dynamics of economies moving towards more selection. As in the Neoclassical model, markets are perfectly competitive, there is only one good and two production factors (capital and labor). At equilibrium, aggregate technology is Neoclassical, but the average quality of capital and the depreciation rate are both endogenous and positively related to selection. At steady state, output per capita and welfare both raise with selection. However, the selection process generates transitional welfare losses that may reduce in around 60% long term (consumption equivalent) welfare gains. The same property is shown to be true in a standard general equilibrium model with entry and fixed production costs.

Item Type: Monograph (Working Paper)
Language: English
Date: September 2021
Place of Publication: Toulouse
Uncontrolled Keywords: Firm dynamics and selection, Neoclassical model, Capital irreversibility, Investment distortions, Transitional dynamics, Welfare gains
JEL Classification: D6 - Welfare Economics
E13 - Neoclassical
E23 - Production
O4 - Economic Growth and Aggregate Productivity
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 08 Sep 2021 08:51
Last Modified: 30 Mar 2022 12:11
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