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On The Calibration of Competitive Industry Dynamics Models

By Gian Luca Clementi and Dino Palazzo

Paper (PDF Format)



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.