Firm Entry and Exit during Recessions

Joao Ayres and Gajendran Raveendranathan

Review of Economic Dynamics, 2023, vol. 47, 47-66

Abstract: We analyze aggregate shocks in a general equilibrium model of firm dynamics with entry and exit and financial frictions. Compared to the productivity shock, a shock to the collateral constraint (credit shock) generates a larger change in firm entry and exit. Calibrating the credit and productivity shocks to the Great Recession, we find that the credit shock accounts for lower entry, higher exit, and the concentration of exit among young firms during the Great Recession. The changes in entry and exit account for 19 and 24 percent of the fall in output and hours, respectively. Furthermore, we discuss how the modeling of potential entrants matters for the quantitative results, and perform a COVID-19 lockdown experiment. (Copyright: Elsevier)

Keywords: Firm dynamics; Recession; Firm entry; Firm exit; Great Recession; COVID-19; General equilibrium model; Credit shock; Lockdown (search for similar items in EconPapers)
JEL-codes: D21 D22 E24 E32 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1016/j.red.2021.12.001

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