Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 66: Firm Tunrover and the Rate of Macroeconomic Growth - Simulating the Macroeconomic Effects of Schumpeterian Creative Destruction

Gunnar Eliasson (), Dan Johansson () and Erol Taymaz
Additional contact information
Gunnar Eliasson: Royal Institute of Technology, Postal: Indrasctructure, SE-100 44 Stockholm , Sweden , and, The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
Dan Johansson: The Ratio Institute, Postal: P.O. Box 5095, SE-102 42 Stockholm, Sweden
Erol Taymaz: Middle East Technical University, Postal: Ankara, Turkey

Abstract: The positive effects of new innovative entry and fast and efficient allocation of resources are balanced against the efficiency of price signaling in markets in a non-linear micro based simulation model of an Experimentally Organized Economy (EOE). In this model increasingly rapid reallocation of resources over markets, moved by innovative new entry and competitive exit (the rate of firm turnover) generates faster growth in output, but eventually, if too fast, is shown to affect the reliability of price signaling in markets and to raise the frequency of investment mistakes. Beyond a certain level of the rate of firm turnover the aggregate effects at the macro level, therefore, turn negative. This optimal growth trajectory depends on the balance between the rates of entry and exit and on the performance of new firms compared to incumbents, their size compared to incumbents and the variation in the same characteristics.

Keywords: Business Mistakes; Economic Systems Stability; Endogenous Growth; Experimentally Organized Economy (EOE); Firm Turnover

JEL-codes: C15; C45; C62; C81; L16; O12

31 pages, January 18, 2005

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