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Entry Decision, the Option to Delay Entry, and Business Cycles

Ia Vardishvili ()

No auwp2020-07, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: I show that firms' ability to delay entry generates a countercyclical opportunity cost of entry and significantly amplifies the effect of the initial aggregate conditions on the selection of entrants. This mechanism enables existing firm dynamics models to reconcile the documented business cycle dynamics of US entrant establishments without leading to an excessive variation in economic aggregates. I find the observed variation of firms at entry is responsible for around three-fourths of the business cycle fluctuations. Finally, I argue that not accounting for the option to delay entry may result in misleading predictions about entrants' responses to different shocks or policies.

Keywords: Option value; entry; firm dynamics; business cycles; propagation; Great Recession (search for similar items in EconPapers)
JEL-codes: D25 E22 E23 E32 E37 L25 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-bec, nep-dge, nep-ind, nep-mac, nep-ore and nep-sbm
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