Entry, Exit, Firm Dynamics, and Aggregate Fluctuations

Abstract

We amend Hopenhayn (1992)'s model of equilibrium industry dynamics by explicitly modeling the firm's investment choice and by introducing aggregate fluctuations. Our main goal is to study the model's implications for the cyclical behavior of entry, exit, and the cross-section of operating firms. We show that the vector of state variables include the size distribution of firms, an infinitedimensional object. We overcome this obstacle by showing that firms incur in small errors when predicting the evolution of the relevant price by means of a simple forecasting rule. Preliminary results show that the model is able to replicate key features of the cross-section of US manufacturing plants, such as the mean and standard deviation of the investment rate, as well as the average entry rate and the average ratio of entrants' size to incumbents' size. Entry rates are higher in expansion than in recession, while the opposite holds true for exit rates. Entering plants tend to be more productive during recessions than during expansions.

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).…”

“…To keep the model tractable, I assume that all entrants start up with initial employment n 0 . The setup of this paper di↵ers from existing work such as Clementi and Palazzo (2010) and Lee and Mukoyama (2012) in an important way:…”

Merger activity in industry equilibrium

“…This feature of our model is common to other studies (e.g., Clementi and Palazzo, 2010). In the calibration, we set the number of incumbents in the first period to N = 1, 000 and the number of potential entrants to N E = 100.…”

“…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.…”

The Great Recession and a Missing Generation of Exporters

“…Growth remains below its pre-crisis trend for an extended period as the missing generation moves through the firm age distribution, even when business creation recovers quickly. Building on Luttmer (2012) and Clementi and Palazzo (2016), Clementi et al (2014) similarly show that a decline in firm birth can have persistent effects in general equilibrium heterogeneous firm models.…”