Creative Destruction in Industries

38 Pages Posted: 19 Sep 2006 Last revised: 19 Mar 2021

See all articles by Boyan Jovanovic

Boyan Jovanovic

New York University - Department of Economics

Chung-Yi Tse

The University of Hong Kong - School of Economics and Finance

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Date Written: September 2006

Abstract

Most industries go through a "shakeout" phase during which the number of producers in the industry declines. Industry output generally continues to rise, however, which implies a reallocation of capacity from exiting firms to incumbents and new entrants. Thus shakeouts seem to be classic creative destruction episodes. Shakeouts of firms tend to occur sooner in industries where technological progress is rapid. Existing models do not explain this. Yet the relation emerges naturally in a vintage-capital model in which shakeouts of firms accompany the replacement of capital, and in which a shakeout is the first replacement echo of the capital created when the industry is born. We fit the model to the Gort-Klepper data and to Agarwal's update of those data.

Suggested Citation

Jovanovic, Boyan and Tse, Chung, Creative Destruction in Industries (September 2006). NBER Working Paper No. w12520, Available at SSRN: https://ssrn.com/abstract=930610

Boyan Jovanovic (Contact Author)

New York University - Department of Economics ( email )

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Chung Tse

The University of Hong Kong - School of Economics and Finance ( email )

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