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.

Evaluating the effects of entry regulations and firing costs on international income differences

“…The aggregate capital stock K may or may not increase with frictions when capital adjustment costs exist-with adjustment costs, an "inefficient" establishment tends to hold too much capital and an "efficient" establishment tends to hold too little capital, and an increase in frictions exacerbates this distortion in both categories. 27 This turns out to be larger than the TFP effect in our benchmark model without capital. If the capital is rented by the establishment, rather than owned, a model with capital and no adjustment cost is reduced to the benchmark model with a higher labor share.…”

“…We set ρ = 0.97. This value is motivated by the highly persistent employment process in the U.S. manufacturing sector, as documented in Lee and Mukoyama (2008). 20 The value of σ is set so that the total job creation rate (JC rate) becomes similar to the data.…”

Firm Entry and Employment Dynamics in the Great Recession

“…Moreover, the current paper is related to the literature on firm entry and exit and in particular to Clementi andPalazzo (2010), Samaniego (2008), and Lee and Mukoyama (2012).…”

Merger activity in industry equilibrium

“…Lee and Mukoyama (2012), instead, base their analysis on the sample of plants covered in the Annual Survey of Manufactures from the U.S. Census Bureau, and find an entry rate of 6.2% and an exit rate of 5.5%.…”

“…A seminal paper in this literature is Hopenhayn (1992), who characterizes the entry and exit levels in stationary industry equilibrium. In recent work that builds on Hopenhayn's framework, Lee and Mukoyama (2012) and Clementi and Palazzo (2010) introduce aggregate productivity shocks and analyze the dynamics of firms' entry and exit decisions over the business cycle. 3 Our main contribution to this literature is to introduce a merger market in which firms can combine their assets and endogenously enhance their productivities.…”