Technological Foundations for Dynamic Models with Endogenous Entry

I explore the technological foundations of dynamic entry models a la Bilbiie-Ghironi-Melitz where the endogenous creation of new inputs can generate either neoclassical business cycle dynamics or long run growth. Under a general CRS technology in labor and intermediate goods produced by monopolistic innovators, substitutability between inputs drives markups and profitability of innovations as functions of the number of firms. Decreasing profitability tends to generate a stable steady state associated with a propagation of shocks fostered by endogenous productivity. The decentralized equilibrium is inefficient and I characterize the optimal policy to fix static and dynamic inefficiencies. (c) 2020 Elsevier B.V. All rights reserved.