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Entry, Exit, Firm Dynamics, and Aggregate Fluctuations


  • Dino Palazzo

    (Boston University)

  • Gian Luca Clementi

    (New York University)


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.

Suggested Citation

  • Dino Palazzo & Gian Luca Clementi, 2010. "Entry, Exit, Firm Dynamics, and Aggregate Fluctuations," 2010 Meeting Papers 1188, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:1188

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    References listed on IDEAS

    1. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304-345.
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    Cited by:

    1. Petrosky-Nadeau, Nicolas, 2013. "TFP during a credit crunch," Journal of Economic Theory, Elsevier, vol. 148(3), pages 1150-1178.
    2. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," 2011 Meeting Papers 484, Society for Economic Dynamics.
    3. Vivek Farias & Bar Ifrach & Gabriel Weintraub, 2012. "A Framework for Dynamic Oligopoly in Concentrated Industries," 2012 Meeting Papers 505, Society for Economic Dynamics.
    4. Simon Mongey & Gianluca Violante & Alessandro Gavazza, 2014. "What Shifts the Beveridge Curve? Recruitment Effort and Financial Shocks," 2014 Meeting Papers 1014, Society for Economic Dynamics.
    5. David Berger, 2012. "Countercyclical Restructuring and Jobless Recoveries," 2012 Meeting Papers 1179, Society for Economic Dynamics.

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