Turbulent Growth: Business Dynamism and Aggregate Productivity

Turbulence is the process of endogenous reallocation of resources (e.g., jobs) across firmsdue to entry, exit, and churning (movements within the firm-size distribution). This paperformulates a model of turbulent endogenous growth built on the insight that the forces thatdrive aggregate productivity growth also drive turbulence because the two are manifestationsof a single underlying process: profit-driven competition for market share through innovation.When firms increase their technological knowledge, they gain market share by loweringtheir relative price, thus reducing the marginal value of further gains in market share. Thisleads to the emergence of diminishing returns in relative terms.Therefore, incentives to innovate decline in relative size, all else constant, generating churning endogenously as mean-reversion. This mechanism delivers a stationary, non-degenerate,and endogenous firm-size distribution dependent on R&D. Meanwhile, constant returns to thecumulative factor (technological knowledge) drive a trendless aggregate growth rate determined by R&D. Endogenous entry and exit entail selection effects that shape the characteristicsof the firm population, and generate a firm life cycle, affecting R&D, thus growth. (JEL: E19, L11, O14, O31, O41)