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Entry and the accumulation of capital: A two state variable extension to the Ramsey model
Author(s) -
Brito Paulo,
Dixon Huw
Publication year - 2009
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/j.1742-7363.2009.00113.x
Subject(s) - economics , free entry , marginal cost , fixed cost , saddle point , capital (architecture) , microeconomics , monotonic function , variable cost , variable (mathematics) , mathematical economics , mathematics , mathematical analysis , geometry , archaeology , history
In this paper we consider the entry and exit of firms in a dynamic general equilibrium model with capital. At the firm level, there is a fixed cost combined with increasing marginal cost, which gives a standard U‐shaped cost curve with optimal firm size. Entry is determined by a free entry condition such that the cost of entry is equal to the present value of incumbent firms. The cost of entry (exit) depends on the flow of entry (exit). Equilibrium is saddle‐point stable and the stable manifold is two‐dimensional. Transitional dynamics can, under certain circumstances, be non‐monotonic.