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Firm Heterogeneity, Endogenous Entry, and the Business Cycle

In: NBER International Seminar on Macroeconomics 2011

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  • Gianmarco I. P. Ottaviano

Abstract

This paper investigates the role that the entry and exit of heterogeneous firms plays in shaping aggregate fluctuations in economic activity. In so doing, it develops a dynamic stochastic general equilibrium model in which procyclical entry and countercyclical exit along a real business cycle lead to endogenous cyclical movements in average firm productivity. These movements stem from a composition effect due to the reallocation of market shares among firms with different levels of efficiency and affect the propagation of exogenous technological shocks. Numerical analysis suggests that existing models with representative firms may overstate the actual role of procyclical entry and exit in imperfectly competitive markets as a propagation mechanism of exogenous technology shocks. The reason is that procyclical entry and countercyclical exit disproportionately involve less efficiency firms whose impact on aggregate economic activity is hampered by their smaller size.

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This chapter was published in:

  • Jeffrey Frankel & Christopher Pissarides, 2012. "NBER International Seminar on Macroeconomics 2011," NBER Books, National Bureau of Economic Research, Inc, number fran11-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12501.

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    1. Gali Jordi, 1994. "Monopolistic Competition, Business Cycles, and the Composition of Aggregate Demand," Journal of Economic Theory, Elsevier, Elsevier, vol. 63(1), pages 73-96, June.
    2. Steve J. Davis & John Haltiwanger, 1991. "Gross Job Creation, Gross Job Destruction and Employment Reallocation," NBER Working Papers 3728, National Bureau of Economic Research, Inc.
    3. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, Econometric Society, vol. 71(6), pages 1695-1725, November.
    4. Florin Bilbiie & Fabio Ghironi & Marc J. Melitz, 2007. "Endogenous Entry, Product Variety, and Business Cycles," NBER Working Papers 13646, National Bureau of Economic Research, Inc.
    5. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2007. "Firms in International Trade," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 21(3), pages 105-130, Summer.
    6. J. Peter Neary, 2007. "Cross-Border Mergers as Instruments of Comparative Advantage," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1229-1257.
    7. Steven J. Davis & R. Jason Faberman & John Haltiwanger, 2006. "The Flow Approach to Labor Markets: New Data Sources and Micro-Macro Links," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 20(3), pages 3-26, Summer.
    8. Choi, E. Kwan & Harrigan, James, 2003. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
    9. Fabio Ghironi & Marc J. Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," Boston College Working Papers in Economics, Boston College Department of Economics 599, Boston College Department of Economics.
    10. Jaimovich, Nir & Floetotto, Max, 2008. "Firm dynamics, markup variations, and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(7), pages 1238-1252, October.
    11. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 295-316.
    12. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
    13. Steven J. Davis & John Haltiwanger, 1990. "Gross Job Creation and Destruction: Microeconomic Evidence and Macroeconomic Implications," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 123-186 National Bureau of Economic Research, Inc.
    14. Christian Broda & David E. Weinstein, 2007. "Product Creation and Destruction: Evidence and Price Implications," NBER Working Papers 13041, National Bureau of Economic Research, Inc.
    15. Katharine G. Abraham & John C. Haltiwanger, 1995. "Real Wages and the Business Cycle," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1215-1264, September.
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    Cited by:
    1. Gianmarco I. P. Ottaviano, 2012. "Agglomeration, Trade and Selection," CEP Discussion Papers dp1129, Centre for Economic Performance, LSE.
    2. Sun, Churen & Tian, Guoqiang & Zhang, Tao, 2011. "When Pareto meets Melitz: the inapplicability of the Melitz-Pareto model for Chinese firms," MPRA Paper 35597, University Library of Munich, Germany.
    3. Sun, Churen & Zhang, Tao, 2012. "Export, Productivity Pattern, and Firm Size Distribution," MPRA Paper 36742, University Library of Munich, Germany.

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