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Endogenous firm creation and destruction over the business cycle

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  • Masashige Hamano

    ()
    (CREA, University of Luxembourg)

Abstract

This paper revisits Schumpeterian destruction in a DSGE model based on monopolistic competition. Firms enter the market through a free entry condition and exit endogenously depending on their specific productivity level. The mechanism of endogenous destruction among heterogeneous firms is based on the probabilistic argument discussed in Melitz (2003). The models in the paper are successful in reproducing observed business cycle patterns for creation and destruction and other major economic variables. The models also feature typical characteristics of Schumpeterian economies as found in literature.

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File URL: http://wwwfr.uni.lu/content/download/61464/719094/file/2013-04%20-%20Endogenous%20firm%20creation%20and%20destruction%20over%20the%20business%20cycle.pdf
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Bibliographic Info

Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 13-04.

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Date of creation: 2013
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Handle: RePEc:luc:wpaper:13-04

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Keywords: entry and exit; firm heterogeneity; the Schumpeterian destruction; business cycles;

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  1. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  2. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "The Growth And Failure Of U.S. Manufacturing Plants," Papers 1-87-5, Pennsylvania State - Department of Economics.
  3. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  4. Yoonsoo Lee & Toshihiko Mukoyama, 2008. "Entry, Exit, and Plant-Level Dynamics over the Business Cycle," Working Papers 08-17, Center for Economic Studies, U.S. Census Bureau.
  5. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  6. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  7. 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.
  8. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jenson & Samuel Kortum, 2000. "Plants and Productivity in International Trade," NBER Working Papers 7688, National Bureau of Economic Research, Inc.
  9. Roberto M. Samaniego, 2008. "Entry, Exit and Business Cycles in a General Equilibrium Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 529-541, July.
  10. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-38, October.
  11. Benassy, Jean-Pascal, 1996. "Taste for variety and optimum production patterns in monopolistic competition," Economics Letters, Elsevier, vol. 52(1), pages 41-47, July.
  12. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, December.
  13. Christian Broda & David E. Weinstein, 2007. "Product Creation and Destruction: Evidence and Price Implications," NBER Working Papers 13041, National Bureau of Economic Research, Inc.
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