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Industry dynamics with stochastic demand
Author(s) -
Bergin James,
Bernhardt Dan
Publication year - 2008
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.1756-2171.2008.00003.x
Subject(s) - economics , productivity , aggregate demand , microeconomics , supply and demand , demand shock , welfare , aggregate (composite) , demand management , distribution (mathematics) , realization (probability) , industrial organization , econometrics , monetary economics , macroeconomics , market economy , monetary policy , mathematical analysis , statistics , materials science , mathematics , composite material
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.