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Entry, Exit, Firm Dynamics, and Aggregate Fluctuations

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  • Dino Palazzo

    (Boston University)

  • Gian Luca Clementi

    (New York University)

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    Abstract

    We amend Hopenhayn'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 infinite--dimensional 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.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1188.

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    Date of creation: 2010
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    Handle: RePEc:red:sed010:1188

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    Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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    Cited by:
    1. David Berger, 2012. "Countercyclical Restructuring and Jobless Recoveries," 2012 Meeting Papers 1179, Society for Economic Dynamics.
    2. Sina T. Ates & Felipe E. Saffie, 2013. "Project Heterogeneity and Growth: The Impact of Selection," PIER Working Paper Archive 13-011, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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