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Endogenous Entry, Product Variety, and Business Cycles

  • Florin O. Bilbiie
  • Fabio Ghironi
  • Marc J. Melitz

This paper builds a framework for the analysis of macroeconomic fluctuations that incorporates the endogenous determination of the number of producers and products over the business cycle. Economic expansions induce higher entry rates by prospective entrants subject to sunk investment costs. The sluggish response of the number of producers generates a new and potentially important endogenous propagation mechanism for business cycle models. The return to investment determines household saving decisions, producer entry, and the allocation of labor across sectors. Our framework replicates several features of business cycles and predicts procyclical profits even for preference specifications that imply countercyclical markups.

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File URL: http://dx.doi.org/10.1086/665825
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File URL: http://dx.doi.org/10.1086/665825
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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 120 (2012)
Issue (Month): 2 ()
Pages: 304 - 345

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Handle: RePEc:ucp:jpolec:doi:10.1086/665825
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