Economics Macro Seminar - Hanbaek Lee (Cambridge) "An Analytic Theory of Frictional Firm Dynamics"

This paper develops an analytical general equilibrium theory of frictional firm dynamics. A parsimonious microfoundation yields a marginal value of capital that is affine in idiosyncratic productivity despite fixed adjustment costs, delivering closed-form adjustment thresholds. We decompose the distance between frictional and frictionless economies through three gap measures—investment, sorting, and output—and establish four results: macroeconomic neutrality is generically impossible; fixed costs amplify aggregate investment semi-elasticities rather than dampen them; firm-level uncertainty affects misallocation non-monotonically through a distributional channel; and the extensive margin generates state-dependent dynamics with endogenous negative skewness.