The cyclicality of entry and exit: The role of imperfect information

Jinhee Woo

Journal of Economic Dynamics and Control, 2022, vol. 137, issue C

Abstract: In the U.S. manufacturing sector, the entry margin is strongly procyclical, whereas the exit margin is acyclical. This study attempts to explain the entry-exit margin asymmetry. It introduces imperfect information in an industry equilibrium model and finds that potential entrants cannot disentangle aggregate productivity from their own productivity, inducing a signal extraction problem. With imperfect information on the aggregate productivity, potential entrants underestimate variations in equilibrium factor prices and overestimate variations in the value of entering. This amplified entry margin, combined with a reasonable amount of general equilibrium forces, mute cyclical variations in the exit margin. With the proposed mechanism, the model economy generates 28% of the observed variations in the entrants’ productivity. Notably, several testable implications of the model economy are consistent with the properties of the U.S. data.

Keywords: Entry and exit; Plant dynamics; Business cycles; Imperfect information (search for similar items in EconPapers)
JEL-codes: D83 E23 E24 E32 L60 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:137:y:2022:i:c:s0165188922000409

DOI: 10.1016/j.jedc.2022.104335

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