Linear and Non-linear Models of Economic Time Series: An Introduction with Applications To Industrial Economics

Abstract

Cubbin and Geroski (1987) propose a mechanism by which the profits of firms in an industry converge to a long-run equilibrium. Their model focuses on the interaction between profits and entry or exit of firms. To illustrate, consider the following simplified version,

$$$$

(10.1)

$$$$

(10.2)

where E _t is some measure of entry or exit of firms into an industry, ρ _t is the deviation of observed profit rates from long-run or normal profit rates, α, β and β₁ are constants and u _t and ε _t are random disturbance terms. Substitution of equation (10.1) into (10.2) yields:

$$$$

(10.3)