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The Neoclassical Model and the Welfare Costs of Selection"

Author

Listed:
  • Fabrice Collard

    (Toulouse School of Economics)

  • Omar Licandro

    (University of Leicester)

Abstract

This paper embeds firm dynamics into the Neoclassical model in a framework with partially reversible capital and investment distortions, allowing for a simple characterization of the transitional dynamics of economies moving towards greater selection. At equilibrium, aggregate technology is Neoclassical, with the quality of capital and the depreciation rate depending on selection. As investment distortions are corrected, selection increases, and both output per capita and welfare rise at the steady state. However, selection destroys existing production capacities, leading to transitional welfare losses. When calibrated to the US, the model shows that developing countries reducing investment distortions to US levels would experience substantial steady-state welfare gains, though transitional costs could absorb 70% to 76% of these gains. While the associated welfare gains from selection at steady-state are significant, between 10% and 23%, transitional costs largely offset these additional welfare gains. (Copyright: Elsevier)

Suggested Citation

  • Fabrice Collard & Omar Licandro, 2025. "The Neoclassical Model and the Welfare Costs of Selection"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 57, July.
    • Handle: RePEc:red:issued:23-240
    DOI: 10.1016/j.red.2025.101284
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    File URL: https://dx.doi.org/10.1016/j.red.2025.101284
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    More about this item

    Keywords

    Firm dynamics and selection; Neoclassical model; Capital irreversibility; Investment distortions; Transitional dynamics; Welfare gains;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • D6 - Microeconomics - - Welfare Economics
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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