Firm entry, excess capacity and endogenous productivity

We show that sluggish firm entry causes productivity to vary endogenously in response to technology shocks. The endogenous productivity effect is caused by incumbent firms utilizing excess capacity as entry adjusts. We develop a nonparametric model of endogenous sunk costs and monopolistic competition to show that imperfect competition and dynamic entry are necessary and jointly sufficient conditions for endogenous productivity fluctuations. Quantitatively we show the endogenous productivity effect is as large as that from a traditional ‘capital utilization’ effect