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Bounded Learning from Incumbent Firms

Working Paper 771 | Published August 7, 2020

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Erzo G.J. Luttmer Visiting Scholar
Bounded Learning from Incumbent Firms


Social learning plays an important role in models of productivity dispersion and long-run growth. In economies with a continuum of producers and unbounded productivity distributions, social learning can sometimes leave long-run growth rates completely indeterminate. This paper modifies a model in which potential entrants attempt to imitate randomly selected incumbent firms by introducing an upper bound on how much entrants can learn from incumbents. When this upper bound is taken to infinity, a unique long-run growth rate emerges, even though the economy without upper bound has an unbounded continuum of balanced growth rates.