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Entry Decision, the Option to Delay Entry, and Business Cycles

Author

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  • Ia Vardishvili

    (Auburn University)

Abstract

This paper demonstrates that the option to delay entry plays an important role in shaping the business cycle behavior of new firms. Using a model calibrated to U.S. firm dynamics, I show that the timing option endogenously generates a countercyclical opportunity cost of entry: during recessions, elevated risk of failure increases the value of waiting, which raises the effective cost of entry. I provide empirical evidence consistent with firms strategically delaying entry in response to changing aggregate conditions. Quantitatively, this channel significantly amplifies firm selection at entry and nearly doubles the cyclical volatility of new firm creation. Overall, variation in the number and composition of entrants accounts for 18% of aggregate employment fluctuations—a contribution more than halved in a model without the option to delay. Ignoring this channel may also lead to misleading predictions about how new firm entry responds to policy interventions. (Copyright: Elsevier)

Suggested Citation

  • Ia Vardishvili, 2026. "Entry Decision, the Option to Delay Entry, and Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 59, January.
    • Handle: RePEc:red:issued:24-97
    DOI: 10.1016/j.red.2025.101319
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    Cited by:

    1. Emin M. Dinlersoz & Timothy Dunne & John Haltiwanger & Veronika Penciakova, 2023. "Local Origins of Business Formation," Policy Hub, Federal Reserve Bank of Atlanta, vol. 2023(7), pages 1-12, November.
    2. Smirnyagin, Vladimir, 2023. "Returns to scale, firm entry, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 134(C), pages 118-134.
    3. Antonova, Anastasiia & Matvieiev, Mykhailo, 2025. "News and firm entry: The role of the waiting option," Journal of Economic Dynamics and Control, Elsevier, vol. 171(C).

    More about this item

    Keywords

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    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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