Industry dynamics with stochastic demand

James Bergin, Dan Bernhardt

Research output: Contribution to journalArticlepeer-review

Abstract

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.

Original languageEnglish (US)
Pages (from-to)41-68
Number of pages28
JournalRAND Journal of Economics
Volume39
Issue number1
DOIs
StatePublished - 2008

ASJC Scopus subject areas

  • Economics and Econometrics

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