On The Calibration of Competitive Industry Dynamics Models
By Gian Luca Clementi and Dino Palazzo
We show that, in the context of the neoclassical model of investment with mean--reverting and log--normally distributed productivity shocks, information on the asymptotic distribution of the investment rate does not identify the parameters of the stochastic process. This likely explains why a variety of recent models with firm--level heterogeneity - both in macroeconomics and in finance - are able to generate sensible cross--sectional investment rate moments in spite of assuming radically different values for the persistence and volatility of the shocks. Information on investment rates does entail a restriction on the two parameters, which in turn implies that -- contingent on the curvature of the production function -- not all recent estimates of the parameters will be consistent with empirically plausible cross--sectional investment rate moments.