A Theory of Growth and Volatility at the Aggregate and Firm Level

55 Pages Posted: 20 Nov 2006 Last revised: 11 Apr 2010

See all articles by Diego Comin

Diego Comin

New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)

Sunil Mulani

Analysis Group

Date Written: August 2005

Abstract

This paper presents an endogenous growth model that explains the evolution of the first and second moments of productivity growth at the aggregate and firm level during the post-war period. Growth is driven by the development of both (i) idiosyncratic R&D innovations and (ii) general innovations that can be freely adopted by many firms. Firm-level volatility is affected primarily by the Schumpeterian dynamics associated with the development of R&D innovations. On the other hand, the variance of aggregate productivity growth is determined mainly by the arrival rate of general innovations. Ceteris paribus, the share of resources spent on development of general innovations increases with the stability of the market share of the industry leader. As market shares become less persistent, the model predicts an endogenous shift in the allocation of resources from the development of general innovations to the development of R&D innovations. This results in an increase in R&D, an increase in firm-level volatility, and a decline in aggregate volatility. The effect on productivity growth is ambiguous. On the empirical side, this paper documents an upward trend in the instability of market shares. It shows that firm volatility is positively associated with R&D spending, and that R&D is negatively associated with the correlation of growth between sectors which leads to a decline in aggregate volatility.

Suggested Citation

Comin, Diego and Mulani, Sunil, A Theory of Growth and Volatility at the Aggregate and Firm Level (August 2005). NBER Working Paper No. w11503, Available at SSRN: https://ssrn.com/abstract=775993

Diego Comin (Contact Author)

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sunil Mulani

Analysis Group ( email )

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
41
Abstract Views
830
PlumX Metrics