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Firm Entry and Exit during Recessions

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  • Ayres, JoaÞo
  • Raveendranathan, Gajendran

Abstract

We analyze shocks to productivity, collateral constraint (credit shock), firm operation, and labor disutility in a model of firm dynamics with entry and exit. Shocks to firm operation and labor disutility capture COVID-19 lockdowns. Compared to the productivity shock, the credit and the lockdown shocks generate larger changes in firm entry and exit. The credit shock accounts for lower entry, higher exit, and concentration of exit among young firms during the Great Recession. The lockdown shocks predict a large fall in entry and rise in exit followed by a sharp rebound. In both recessions, changes in entry and exit account for 10-20 percent of the fall in output and hours. Finally, we discuss how the modeling of potential entrants matters for the quantitative results.

Suggested Citation

  • Ayres, JoaÞo & Raveendranathan, Gajendran, 2021. "Firm Entry and Exit during Recessions," IDB Publications (Working Papers) 11353, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:11353
    DOI: http://dx.doi.org/10.18235/0003356
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    Cited by:

    1. Xuanli Zhu, 2025. "Establishment dynamics in post-war Japan: missing entry and shrinking size," The Japanese Economic Review, Springer, vol. 76(2), pages 337-374, April.
    2. Otrachshenko, Vladimir & Popova, Olga & Nikolova, Milena & Tyurina, Elena, 2022. "COVID-19 and entrepreneurship entry and exit: Opportunity amidst adversity," Technology in Society, Elsevier, vol. 71(C).
    3. Miller, Jason W. & Phares, Jonathan & Burks, Stephen V., 2025. "Bring Out the Bulls: Employment Dynamics of Trucking Firms During Highly Expansive Market Conditions," IZA Discussion Papers 17627, Institute of Labor Economics (IZA).
    4. Danilo Stojanovic & Veljko Bojovic, 2025. "Firm-level Uncertainty and Frictions: Implications for Capital and Financial Decisions in the US," CERGE-EI Working Papers wp793, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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