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Annual Review of Economics

Volume 13, 2021

Empirical Models of Industry Dynamics with Endogenous Market Structure

Abstract

This article reviews recent developments in the study of firm and industry dynamics, with a special emphasis on the econometric endogeneity of market structure. The endogeneity of market structure follows from the presence of serially correlated unobservable shocks to the profitability of firms’ dynamic decisions, a feature common to many empirical settings. Methods that ignore endogeneity can lead to misleading parameter estimates and misleading counterfactual results. We pay particular attention to extensions of standard two-step methods that leverage instrumental variables to address endogeneity in both single-agent and oligopoly models. A first step set-identifies dynamic policy functions together with serial correlation parameters, and a second step quickly solves for profit function parameters using an extension of existing forward-simulation methods. We discuss how these new methods provide a general solution to initial-conditions problems and how they can yield practical estimation strategies.

Keyword(s): autocorrelation, dynamic models, endogenous market structure, JEL C23, JEL C26, JEL L11, state dependence, two-step methods
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/content/journals/10.1146/annurev-economics-081720-120019
2021-08-05
2024-05-13
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/content/journals/10.1146/annurev-economics-081720-120019
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Empirical Models of Industry Dynamics with Endogenous Market Structure
Annual Review of Economics 13, 309 (2021); https://doi.org/10.1146/annurev-economics-081720-120019
/content/journals/10.1146/annurev-economics-081720-120019
/content/journals/10.1146/annurev-economics-081720-120019
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