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This paper analyzes the implications of plant-level dynamics over the business cycle. We first document basic patterns of entry and exit of U.S. manufacturing plants, in terms of employment and productivity, between 1972 and 1997. We show how entry and exit patterns vary during the business cycle, and that the cyclical pattern of entry is very different from the cyclical pattern of exit. Second, we build a general equilibrium model of plant entry, exit, and employment and compare its predictions to the data. In our model, plants enter and exit endogenously, and the size and productivity of entering and exiting plants are also determined endogenously. Finally, we explore the policy implications of the model. Imposing a firing tax that is constant over time can destabilize the economy by causing fluctuations in the entry rate. Entry subsidies are found to be effective in stabilizing the entry rate and output.

JEL classification: J23 H25 H73 R58Keywords: Entry Exit Relocation Tax incentive Competition among state and local governments to lure businesses has attracted considerable interest from economists, as well as legislators and policy makers. This paper quantifies the role of plant relocations in the geographic redistribution of manufacturing employment and examines the effectiveness of state development policy. Only a few studies have looked at how manufacturing firms locate their production facilities geographically; they have used either small manufacturing samples or small geographic regions. This paper provides broader evidence of the impact of plant relocations using confidential establishment level data from the US Census Longitudinal Research Database (LRD), covering the full population of manufacturing establishments in the United States over the period from 1972 to 1992. This paper finds a relatively small role for relocation in explaining the disparity of manufacturing employment growth rates across states. Moreover, it finds evidence of very weak effects of incentive programs on plant relocations.

We estimate firm-level idiosyncratic risk in the U.S. manufacturing sector. Our proxy for risk is the volatility of the portion of growth in sales or TFP which is not explained by either industry-or economy-wide factors, or firm characteristics systematically associated with growth itself. We find that idiosyncratic risk accounts for about 90% of the overall uncertainty faced by firms. The extent of cross-sectoral variation in idiosyncratic risk is remarkable. Firms in the most volatile sector are subject to at least three times as much uncertainty as firms in the least volatile. Our evidence indicates that idiosyncratic risk is higher in industries where the extent of creative destruction is likely to be greater.

This paper analyzes the implications of plant-level dynamics over the business cycle. We first document basic patterns of entry and exit of U.S. manufacturing plants, in terms of employment and productivity, between 1972 and 1997. We show how entry and exit patterns vary during the business cycle, and that the cyclical pattern of entry is very different from the cyclical pattern of exit. Second, we build a general equilibrium model of plant entry, exit, and employment and compare its predictions to the data. In our model, plants enter and exit endogenously, and the size and productivity of entering and exiting plants are also determined endogenously. Finally, we explore the policy implications of the model. Imposing a firing tax that is constant over time can destabilize the economy by causing fluctuations in the entry rate. Entry subsidies are found to be effective in stabilizing the entry rate and output.