Business Formation and Cyclical Markups in the French Business Cycle

Two main aspects of the business cycle have been recently considered as important lines of research: business formation and cyclical fluctuations of markups. In an explicitly imperfect competition framework, one needs to understand how entry and exit are related to markup fluctuations, and how this may account for the effect of aggregate demand on economic activity. The paper has two different goals. The first one is to document on French data the pro-cyclicality of business formation and the counter-cyclicality of markups. The second one is to build an intertemporal stochastic general equilibrium model which gives a common explanation to these two phenomena. A first (quite simple) model is proposed, with monopolistic competition between industries and Cournot competition with free entry inside each industry. A reduced-form model of more satisfactory intertemporal behavior of firms in their entry/exit and markups decisions is then proposed, which will motivate further work to give game-theoretic micro-foundations to these intertemporal behaviors.