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Entry, Exit, Firm Dynamics, and Aggregate Fluctuations

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  • Gian Luca Clementi

    ()
    (Department of Economics, Stern School of Business, New York University and RCEA)

  • Dino Palazzo

    ()
    (Department of Finance and Economics, Boston University School of Management)

Abstract

How important are firm entry and exit in shaping aggregate dynamics? We address this question by characterizing the equilibrium allocation in Hopenhayn (1992)’s model of equilibrium industry dynamics, amended to allow for investment in physical capital and aggregate fluctuations. We find that entry and exit propagate the effects of aggregate shocks. In turn, this results in greater persistence and unconditional variation of aggregate time-series. In the aftermath of a positive productivity shock, the number of entrants increases. The new firms are smaller and less productive than the incumbents, as in the data. As the common productivity component reverts to its unconditional mean, the new entrants that survive become progressively more productive, keeping aggregate efficiency higher than in a scenario without entry or exit. We also find that both the mean and variance of the cross-sectional distribution of firm–level productivity are counter–cyclical, in spite of the assumption that innovations to firm–level productivity are i.i.d. and orthogonal to aggregate shocks. This happens because of selection: the idiosyncratic productivity of the marginal entrant is lower in expansion than during recessions. Since idiosyncratic productivity is mean–reverting, mean and variance of the distribution of productivity growth are pro–cyclical.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 27_10.

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Date of creation: Jan 2010
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Handle: RePEc:rim:rimwps:27_10

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Keywords: Selection; Propagation; Persistence; Survival; Reallocation;

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Cited by:
  1. 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.
  2. Nicolas Petrosky-Nadeau, . "TFP during a Credit Crunch," GSIA Working Papers 2010-E70, Carnegie Mellon University, Tepper School of Business.
  3. Takashi Kamihigashi & John Stachurski, 2013. "Exact Sampling from the Stationary Distribution of Entry-Exit Models," Discussion Paper Series DP2013-03, Research Institute for Economics & Business Administration, Kobe University.
  4. Takashi Kamihigashi & John Stachurski, 2012. "Exact Draws from the Stationary Distribution of Entry-Exit Models," Discussion Paper Series DP2012-26, Research Institute for Economics & Business Administration, Kobe University.
  5. David Berger, 2012. "Countercyclical Restructuring and Jobless Recoveries," 2012 Meeting Papers 1179, Society for Economic Dynamics.
  6. Thorsten Drautzburg, 2013. "Entrepreneurial tail risk: implications for employment dynamics," Working Papers 13-45, Federal Reserve Bank of Philadelphia.
  7. Can Tian, 2012. "Riskiness Choice and Endogenous Productivity Dispersion over the Business Cycle," PIER Working Paper Archive 12-025, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  8. Theodosios Dimopoulos & Stefano Sacchetto, . "Merger Activity in Industry Equilibrium," GSIA Working Papers 2012-E47, Carnegie Mellon University, Tepper School of Business.
  9. Tian, Can, 2011. "Technology choice and endogenous productivity dispersion over the business cycles," MPRA Paper 34480, University Library of Munich, Germany, revised 02 Nov 2011.
  10. Miguel Casares & Jean-Christophe Poutineau, 2014. "A DSGE model with endogenous entry and exit," Carleton Economic Papers 14-06, Carleton University, Department of Economics.
  11. Petr Sedlacek & Vincent Sterk, 2014. "The Growth Potential of Startups over the Business Cycle," Discussion Papers 1403, Centre for Macroeconomics (CFM).

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