Creative Destruction in Industries

Posted: 4 Nov 2009

See all articles by Boyan Jovanovic

Boyan Jovanovic

New York University - Department of Economics

Chung -Yi Tse

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: 2006

Abstract

Several researchers have attempted to explain industry"shakeouts" (i.e., creative destruction episodes during which industryoutput continues to rise in spite of a high number of exiting firms), butcurrent models do not account for the fact that shakeout occurs earlier inindustries marked by rapid technological progress. The purpose of this study is to introduce a vintage-capital model thataccounts for industry age at shakeout. All technological change in the model isembodied in capital, which means that a fraction of the capital stock isreplaced by new capital during a shakeout. In other words, the number ofefficiency units of capital stays the same but the productivity of capital perphysical units rises. The five propositions suggested by the model are tested in light of theshakeout patterns identified in 1982 by Gort and Klepper. The test resultsconfirm that shakeouts of firms do indeed occur earlier in industries wheretechnological progress is faster. The fact that outputs continue to rise duringthe shakeout episodes suggests that shakeouts are replacement episodes.(SAA)

Keywords: Creative destruction, Market growth, Startups, Established firms, Closing firms, Technological change, Exit rates, Industrial output

Suggested Citation

Jovanovic, Boyan and Tse, Chung -Yi, Creative Destruction in Industries (2006). University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN: https://ssrn.com/abstract=1497867

Boyan Jovanovic (Contact Author)

New York University - Department of Economics ( email )

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New York, NY 10012
United States

Chung -Yi Tse

affiliation not provided to SSRN

No Address Available

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