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Firm entry and exit, investment irreversibility, and business cycle dynamics

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Abstract

This paper studies the role of firms' entry and exit for business cycle dynamics in an environment, where physical capital is partially sunk. Extending a heterogeneous-firm model à la Hopenhayn (1992) by aggregate productivity shocks and partially irreversible investment yields substantial endogenous amplification and propagation. A positive aggregate productivity shock increases the number of entrants and their initial investment levels, because the expected entry value outweighs the implicit sunk cost associated with investment irreversibility. The endogenous propagation of an exogenous stimulus arises via a built-in selection device, as the production growth of new businesses over their lifecycle exceeds the decay due to exits of the least productive firms.

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  • Pavol Majher, 2015. "Firm entry and exit, investment irreversibility, and business cycle dynamics," Vienna Economics Papers vie1513, University of Vienna, Department of Economics.
    • Handle: RePEc:vie:viennp:vie1513
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    More about this item

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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