Learning-by-doing, organizational capital and optimal markup variations

We characterize optimal markup variations in an otherwise standard Ramsey model augmented with learning-by-doing mechanism to firms' technology. In our setup, firms learn from their production experience and accumulate an intangible organizational capital stock which raises their future productivity. Two main results emerge from our study. First, optimal Ramsey allocation features procyclical markup variations. Second, the level of markup is inversely related to the degree of learning. Both of these results stem from a common source - the dynamic link between the current level of production and the future levels of productivity. A change in markup not only changes demand and the level of production in the current period, it also affects the stock of organizational capital and productivity in the future. So, by changing markups procyclically, the Ramsey planner can essentially dampen the cyclical effects of a persistent productivity shock. With a higher learning rate the future productivity gain from a marginal fall in markup is larger and hence our model predicts that optimal markup should be lower for a higher rate of learning.