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Economics Research Institute Study Paper




Utah State University Department of Economics

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This paper proposes a method to analyze endogenous fluctuations of aggregate investment when firm-level investment follows an (S,s) policy and has a spillover effect on other firms' investments. First, we derive the distribution function of aggregate fluctuations in a partial equilibrium of differentiated product markets, under the assumption that a firm's position in its (S,s) band follows a uniform distribution. Second, the variance of the growth rate of average capital is shown to converge to a non-zero value when the number of firms tends to infinity, if the technology exhibits constant returns to scale. Third, we numerically compute the equilibrium paths in which the firms' positions evolve deterministically. The simulations uphold our analytical results as well as exhibit echo effects in the output series. Finally, a case of general equilibrium with imperfect information is presented in which the analytical results continue to hold.