Entry, Exit, Firm Dynamics, and Aggregate Fluctuations

Gian Luca Clementi and Berardino Palazzo

Working Paper series from Rimini Centre for Economic Analysis

Abstract: How important are firm entry and exit in shaping aggregate dynamics? We address this question by characterizing the equilibrium allocation in Hopenhayn (1992)’s model of equilibrium industry dynamics, amended to allow for investment in physical capital and aggregate fluctuations. We find that entry and exit propagate the effects of aggregate shocks. In turn, this results in greater persistence and unconditional variation of aggregate time-series. In the aftermath of a positive productivity shock, the number of entrants increases. The new firms are smaller and less productive than the incumbents, as in the data. As the common productivity component reverts to its unconditional mean, the new entrants that survive become progressively more productive, keeping aggregate efficiency higher than in a scenario without entry or exit. We also find that both the mean and variance of the cross-sectional distribution of firm–level productivity are counter–cyclical, in spite of the assumption that innovations to firm–level productivity are i.i.d. and orthogonal to aggregate shocks. This happens because of selection: the idiosyncratic productivity of the marginal entrant is lower in expansion than during recessions. Since idiosyncratic productivity is mean–reverting, mean and variance of the distribution of productivity growth are pro–cyclical.

Keywords: Selection; Propagation; Persistence; Survival; Reallocation (search for similar items in EconPapers)
JEL-codes: D21 D92 E32 L11 (search for similar items in EconPapers)
Date: 2010-01
New Economics Papers: this item is included in nep-bec, nep-dge, nep-ent and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (55)

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Related works:
Journal Article: Entry, Exit, Firm Dynamics, and Aggregate Fluctuations (2016)
Working Paper: Entry, Exit, Firm Dynamics, and Aggregate Fluctuations (2013)
Working Paper: Entry, Exit, Firm Dynamics, and Aggregate Fluctuations (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:27_10

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