The stochastic implications of autonomous creation and destruction

Abstract

A model of stochastic, autonomous creative destruction is developed to study a change in the volatility of inter-firm productivity shocks. The model shows that the observed increase in the variance of firm-specific technology shocks can explain the recent growth slowdown observed in recent decades. This also has implications for inequality. The economy exhibits a non-optimal rate of business destruction, and policies are developed to address this and to raise welfare. The model yields a novel asset pricing formula involving a survival function reflecting the expected random, productivity-dependent lifetime of the firm, and this has implications for the volatility of returns.