The Neoclassical Model and the Welfare Costs of Selection

Arbeitspapier

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.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 9249

Classification and Topics

• Classification: Wirtschaft ; General Aggregative Models: Neoclassical ; Macroeconomics: Production ; Welfare Economics: General ; Economic Growth and Aggregate Productivity: General
• Subject: firm dynamics and selection ; neoclassical model ; capital irreversibility ; investment distortions ; transitional dynamics ; welfare gains

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Collard, Fabrice ; Licandro, Omar
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/245430