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Dynamic inefficiency with a decreasing returns technology for firms*

Published online by Cambridge University Press:  17 August 2016

Gianluca Femminis
Gianluca Femminis*
Affiliation:
Università Cattolica di Milano and CEPR
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Summary

In this paper, we highlight the possibility of dynamically inefficient equilibria in a model with strictly convex production function at the firm’s level. Decreasing returns imply the existence of some pure profit and hence of an asset market. We endogenise the number of firms by introducing a sunk cost that is to be paid upon entering into the market; since this cost is assumed to be constant, the number of firms increases over time in response to population growth (and aggregate returns to scale are constant). It turns out that the growth of the number of firms reduces the rate used to discount future profits, allowing for dynamic inefficiency. We also consider the presence of a constant and exogenous probability of failure affecting firms.

Résumé

Résumé

Ce papier démontre l’existence possible d’équilibres dynamiques inefficaces pour une firme avec une production strictement convexe. Des rendements d’échelle décroissants impliquent l’existence d’un profit pur. Nous endogénéisons le nombre de firmes en introduisant un sunk cost à payer en entrant dans le marché. Comme ce coût est constant, le nombre de firmes augmente dans le temps suite à la croissance de la population (et les rendements d’échelle agrégés constants). La croissance du nombre de firmes réduit ainsi le taux d’actualisation de profits futurs, permettant ainsi l’inefficacité dynamique.

Keywords

041041
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 66 , Issue 1 , 2000 , pp. 3 - 19
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2000 

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Footnotes

*

I thank Neil Rankin and Philippe Weil for extremely helpful suggestions on a previous version of this work. I benefited also from the detailed comments of two referees. The present paper was partly written during a stay at Princeton University, whose hospitality is gratefully acknowledged. Usual disclaimers apply. Financial support from C.N.R. and M.U.R.S.T. has been greatly appreciated.

**

Istituto di Teoria Economica, Università Cattolica di Milano, Via Nocchi 5, 20123 Milano, Italy. E-mail: femminis@mi.unicatt.it

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