Research Interests: Industrial Organization, Economics Development, International Economics. |
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A Structural Model of Establishment and Industry Evolution: Evidence from Chile (Job Market Paper) Updated on December 26 Many recent models have been developed to fit basic facts on establishment and industry evolution. While these models yield a simple interpretation of the basic features of the data, they are too stylized to confront the micro-level data in a more formal quantitative analysis. In this paper, I develop a model in which establishments grow by innovating new products and by investing on the quality of their innovations. By introducing quality improvement dimension to a stylized industry evolution model, I succeed in explaining several features of the data including the thick right tail of the size distribution, the relations between age, size and the hazard rate of exit that had eluded existing models. In the model, heterogeneity in producer behavior arises through a combination of exogenous efficiency differences as in Melitz (2003) and accumulated innovations resulting from the past endogenous R&D investments as in Klette and Kortum (2004). Integrating these two forces and the quality improvement activity allows the model to perform well quantitatively in fitting data on Chilean Manufacturers. I also utilize the model to explain the economic consequences of the 1984-86 tax reform in Chile. The model successfully captures the significant impact of the reform on establishment growth rates and the exit rate. JEL Classification:
L11, L6, O31, C15 |
References Prof. Samuel Kortum kortum@uchicago.edu Prof. Thomas Holmes holmes@umn.edu Prof. Erzo Luttmer luttmer@umn.edu Dr. Simran Sahi ssahi@econ.umn.edu
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Testing New Models of Establishment and Industry Dynamics (Working Paper) Click for Slides Understanding establishment and industry dynamics has been a fundamental goal in Industrial Organization literature. Klette and Kortum (2004) present a model that can successfully generate the qualitative behavior that is consistent with the empirical regularities on establishment evolution and their aggregate consequences. However they make no attempt to show the quantitative power of their findings. This study tests the quantitative strength of Klette and Kortum model using a detailed micro-level dataset of Chilean Manufacturing industry and shows: i-) how well the model captures the observed facts on establishment and industry evolution ii-) which observed facts the model fails to replicate and iii-) whether the “stylized facts” on industry evolution that are compelling for many developed countries also hold for a small and developing country. Then through introducing random sized markets for establishments’ products, I show how the model improves in matching the observed industry facts. Finally, I analyze the productivity - size growth correlation observed in the data and explain how the model can be improved to capture this regularity.
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