Firm Dynamics and the Importance of the Embodied Question

This paper contributes to the literature on both embodied technical progress and firm dynamics, by formulating an endogenous growth model where selection and imitation play a fundamental role in helping capital good producers to learn about the productivity of technologies embodied in new machines. By calibrating the model to some key aggregates particularly relevant for the embodied capital literature, among them the growth rate of the relative price of investment, the model quantitatively replicates the main facts associated to firm dynamics, such as the entry rate and the tail index of the establishment size distribution. In line with the previous literature, it also predicts a contribution to productivity growth of embodied technical progress and selection of around 60%. JEL codes: B52, O3, O41 ∗We thank Paolo Giordani, Bart Hobijn, Thanh Le, Pietro Peretto, Morten Ravn, Roberto Samaniego, Paul Segerstrom, and seminar participants at the European University Institute, the Swiss Federal Institute of Technology Zurich, IZA Bonn, and the SED, EEA, ASSET, and ISS conferences for helpful comments and suggestions. A previous version of this paper has circulated under the name “Growth through Selection under Rational Expectations.” The authors acknowledge the financial support of the EC, contract HPRN-CT-2002-00237. Omar Licandro also acknowledges support from the Spanish Ministry of Education under projects SEJ2004-0459/ECON and SEJ2007-65552, and the Spanish Ministry of Economy and Competitiveness, through the Severo Ochoa Programme for Centres of Excellence in R&D (SEV-2011-0075). †Swiss National Bank. ‡IAE-CSIC and Barcelona GSE.