A dynamic stochastic model for a competitive industry is developed in which entry, exit, and the growth of firms' output and employment is determined. The paper extends long-run industry equilibrium theory to account for entry, exit, and heterogeneity in the size and growth rate of firms. Conditions under which there is entry and exit in the long run are developed. Cross sectional implications and distributions of profits and value of firms are derived. Comparative statics on the equilibrium size distribution and turnover rates are analyzed.

There is widespread evidence supporting the conjecture that borrowing constraints have important implications for firm growth and survival.In this paper we model a multi-period borrowing/lending relationship with asymmetric information.We show that borrowing constraints emerge as a feature of the optimal long-term lending contract, and that such constraints relax as the value of the borrower's claim to future cash-flows increases.We also show that the optimal contract has interesting implications for firm dynamics.In agreement with the empirical evidence, as age and size increase, mean and variance of growth decrease, firm survival increases, and the sensitivity of investment to cash-flows declines.

There is widespread evidence supporting the conjecture that borrowing constraints have important implications for firm growth and survival. In this paper we model a multiperiod borrowing/lending relationship with asymmetric information. We show that borrowing constraints emerge as a feature of the optimal long-term lending contract, and that such constraints relax as the value of the borrower's claim to future cash flows increases. We also show that the optimal contract has interesting implications for firm dynamics. In agreement with the empirical evidence, as age and size increase, mean and variance of growth decrease, and firm survival increases.

The existence and stability of invariant distributions for stochastically monotone processes is studied. The Knaster-Tarski fixed point theorem is applied to establish existence of fixed points of mappings on compact sets of measures that are increasing with respect to a stochastic ordering. Global convergence of a monotone Markov process to its unique invariant distribution is established.under an easily verified assumption. Topkis's theory of supermodular functions is applied to stochastic dynamic optimization, providing conditions under which optimal stationary decisions are monotone functions of the state and induce a monotone Markov process. Applications of these results to investment theory, stochastic growth and industry equilibrium dynamics are given.

This article studies optimal patents with respect to the timing of innovation disclosure. In a simple model, we identify forces that lead firms to either suboptimally patent too early or too late in equilibrium, and we determine conditions so that stronger patents induce earlier or later equilibrium disclosure. Then, by solving an infinite multistage patent game with a more explicit structure, we describe innovation growth, and derive detailed predictions that can be used for policy experiments. As an application, we calibrate our multistage game using summary statistics from the seeds breeding industry. We find that weaker patent rights may result in welfare gains of 46% relative to the status quo. The gains are achieved because weaker patents reduce competition, thus leading firms to postpone patenting.

We develop a general model of lending in the presence of endogenous borrowing constraints. Borrowing constraints arise because borrowers face limited liability and debt repayment cannot be perfectly enforced. In the model, the dynamics of debt are closely linked with the dynamics of borrowing constraints. In fact, borrowing constraints must satisfy a dynamic consistency requirement: the value of outstanding debt restricts current access to short-term capital, but is itself determined by future access to credit. This dynamic consistency is not guaranteed in models of exogenous borrowing constraints, where the ability to raise short-term capital is limited by some prespecified function of debt. We characterize the optimal default-free contract—which minimizes borrowing constraints at all histories—and derive implications for firm growth, survival, leverage and debt maturity. The model is qualitatively consistent with stylized facts on the growth and survival of firms. Comparative statics with respect to technology and default constraints are derived.

In existing unemployment insurance programmes, it is standard to condition eligibility on the previous employment record of unemployed workers. The purpose of this article is to study conditions under which the efficient contract exhibits these properties. In order to do so, we characterize the optimal unemployment insurance contract in asymmetric information environments in which workers experience multiple unemployment spells. We show that if quits cannot be distinguished from layoffs, it is optimal to condition the benefits paid to unemployed workers on their employment history, in particular, the coverage should increase with the length of previous employment spells.

Entrepreneurs bear substantial risk, but empirical evidence shows no sign of a positive premium. This paper develops a theory of endogenous entrepreneurial risk taking that explains why self-financed entrepreneurs may find it optimal to invest in risky projects offering no risk premium. Consistently with empirical evidence, the model predicts that poorer entrepreneurs are more likely to undertake risky projects. It also finds that incentives for risk taking are stronger when agents are impatient.

This paper considers the design of an optimal unemployment insurance system. The problem is modeled as a repeated principalagent problem involving a risk‐averse agent‐the unemployed worker‐and a risk‐neutral principal, which cannot monitor the agent's search effort. The optimal long‐term contract subject to the associated incentive constraints is characterized. This contract involves a replacement ratio that decreases throughout the unemployment spell and a wage tax after reemployment that, under some mild regularity conditions, increases with the lenght of the unemployment spell. Some numerical results are presented that suggest that the gains from switching to this optimal unemployment insurance scheme could be quite large. The performance of this optimal contract is also compared to alternative liquidity provision mechanisms.

We propose a theory linking imperfect information to resource misallocation and hence to aggregate productivity and output. In our setup, firms look to a variety of noisy information sources when making input decisions. We devise a novel empirical strategy that uses a combination of firm-level production and stock market data to pin down the information structure in the economy. Even when only capital is chosen under imperfect information, applying this methodology to data from the United States, China, and India reveals substantial losses in productivity and output due to the informational friction. Our estimates for these losses range from 7% to 10% for productivity and 10% to 14% for output in China and India, and are smaller, though still significant, in the United States. Losses are substantially higher when labor decisions are also made under imperfect information. We find that firms turn primarily to internal sources for information; learning from financial markets contributes little, even in the United States.