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Markov-Perfect Industry Dynamics: A Framework for Empirical Work

Markov-Perfect Industry Dynamics: A Framework for Empirical Work Abstract This paper provides a model of firm and industry dynamics that allows for entry, exit and firm-specific uncertainty generating variability in the fortunes of firms. It focuses on the impact of uncertainty arising from investment in research and exploration-type processes. It analyses the behaviour of individual firms exploring profit opportunities in an evolving market place and derives optimal policies, including exit, in this environment. Then it adds an entry process and aggregates the optimal behaviour of all firms, including potential entrants, into a rational expectations, Markov-perfect industry equilibrium, and proves ergodicity of the equilibrium process. Numerical examples are used to illustrate the more detailed characteristics of the stochastic process generating industry structures that result from this equilibrium. This content is only available as a PDF. © 1995 The Review of Economic Studies Limited http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Economic Studies Oxford University Press

Markov-Perfect Industry Dynamics: A Framework for Empirical Work

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References (35)

Publisher
Oxford University Press
Copyright
© 1995 The Review of Economic Studies Limited
ISSN
0034-6527
eISSN
1467-937X
DOI
10.2307/2297841
Publisher site
See Article on Publisher Site

Abstract

Abstract This paper provides a model of firm and industry dynamics that allows for entry, exit and firm-specific uncertainty generating variability in the fortunes of firms. It focuses on the impact of uncertainty arising from investment in research and exploration-type processes. It analyses the behaviour of individual firms exploring profit opportunities in an evolving market place and derives optimal policies, including exit, in this environment. Then it adds an entry process and aggregates the optimal behaviour of all firms, including potential entrants, into a rational expectations, Markov-perfect industry equilibrium, and proves ergodicity of the equilibrium process. Numerical examples are used to illustrate the more detailed characteristics of the stochastic process generating industry structures that result from this equilibrium. This content is only available as a PDF. © 1995 The Review of Economic Studies Limited

Journal

The Review of Economic StudiesOxford University Press

Published: Jan 1, 1995

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