Entry, Exit, Firm Dynamics, and Aggregate Fluctuations
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.
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