Abstract
Abstract This paper considers a two-sector real business cycle model augmented with firm heterogeneity and firm dynamics, and studies the steady state and dynamic properties of the model in response to a decline in the relative price of investment. It shows that both firm heterogeneity and entry play a crucial role in the decline in the labour share and the increase in capital intensity observed in the US economy. Using ORBIS firm-level data of the US economy, the paper finds robust evidence consistent with the mechanisms described in the model.
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