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Firm Exit during Recessions

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  • Ayres, JoaÞo
  • Raveendranathan, Gajendran

Abstract

We analyze a general equilibrium model of firm dynamics to study the effects of shocks to productivity, labor wedge, and collateral constraint (credit shock) on firm exit. We find that only the credit shock increases firm exit. This result is robust to the magnitude of shocks and different model specifications. Calibrating the model to match the behavior of output, employment, and firm debt during the Great Recession (2007-2009) in the United States, we find that the credit shock accounts for the observed rise in firm exit and its concentration among young firms. Furthermore, it accounts for 20 percent of the drop in output and employment.

Suggested Citation

  • Ayres, JoaÞo & Raveendranathan, Gajendran, 2020. "Firm Exit during Recessions," IDB Publications (Working Papers) 10249, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:10249
    DOI: http://dx.doi.org/10.18235/0002289
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    More about this item

    Keywords

    Employment; firm dynamics; general equilibrium model; Credit; Output;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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