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Working Papers

Turbulent Growth: Business Dynamism and Aggregate Productivity
Turbulence is the process of endogenous reallocation of resources (e.g., jobs) across firms due to entry, exit, and churning (movements within the firm-size distribution). This paper formulates a model of turbulent endogenous growth built on the insight that the forces that drive aggregate productivity growth also drive turbulence because the two are manifestations
of a single underlying process: profit-driven competition for
market share through innovation.
When firms increase their technological knowledge, they gain market share
by lowering their relative price, thus reducing the marginal value of further gains in market share. This leads to the emergence of diminishing returns in relative terms. Therefore, incentives to innovate decline in relative size, all else constant, generating churning endogenously as mean reversion.
This mechanism delivers a stationary, non-degenerate, and endogenous firm-size distribution dependent on R&D. Meanwhile, constant returns to the cumulative factor (technological knowledge) drive a trendless aggregate growth rate determined by R&D. Endogenous entry and exit entail selection effects that shape the characteristics of the firm population, and generate a firm life cycle, affecting R&D, thus growth.

Business Cycles, R&D, and Hysteresis: An Empirical Analysis with Hedieh Shadmani

This paper investigates the permanent effect of cyclical shocks on total factor productivity. We estimate a structural vector autoregression (VAR) where endogenous growth theory informs our restrictions and choice of variables. According to theory, the stock of technological knowledge promotes its flow as researchers “stand on the shoulders of giants.” Therefore, if R&D investment is pro-cyclical — as data show and theory predicts — a recession leads to a temporary deviation of the R&D level from its trend, thus reducing new knowledge creation. The consequent technological stock loss sets the economy on a parallel but permanently lower trend. The results are in line with theoretical predictions following a recessionary shock. Specifically, the US economy loses 2.8% in total factor productivity for a one standard deviation increase in unemployment. Finally, following a positive total factor productivity (TFP) shock, R&D declines, in line with the opportunity cost mechanism proposed by Schumpeterand in contrast with some recent theoretical models’ predictions. Although TFP shocks are an unimportant source of variation, they help discriminate between different theories on the pro-cyclicality of R&D. While our results rule out most explanations for why R&D is pro-cyclical, they are consistent with models where financial frictions drive the pro-cyclicality.

Work In Progress

Water Salinity and Economic Activity in Coastal Areas: A Model of Adaptation to Sea Level Rise with Robert Nazarian and William F. Vasquez

A Structural Aggregate Productivity Decomposition

Research: Education
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