Entry, Exit and Plant-Level Dynamics over the Business Cycle

Abstract

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.

Market Exposure and Endogenous Firm Volatility over the Business Cycle

“…The most productive firms expand in response to an increase in the aggregate shock, whereas the less productive firms change their market exposure only slightly. This cyclical expansion and contraction is in line with the procyclical net entry rate found for the manufacturing sector by Lee and Mukoyama (2012). Moreover, the uneven response of the change in the number of markets by firm size is also consistent with the data (see Figure 6 and Table 6 that follows).…”

Financial Frictions and Fluctuations in Volatility

“…Likewise, the standard deviation of the median spread is the standard deviation of the cross-sectional medians. The …nal three are the mean productivity and mean employment of entrants relative to incumbents, as reported by Lee and Mukoyama (2012), and an average leverage of entrants equal to that of incumbents.…”

Financial Frictions and Fluctuations in Volatility

“…Likewise, the standard deviation of the median spread is the standard deviation of the cross-sectional medians. The …nal three are the mean productivity and mean employment of entrants relative to incumbents, as reported by Lee and Mukoyama (2012), and an average leverage of entrants equal to that of incumbents. Our model is highly nonlinear, and all parameters a¤ect all the moments.…”