Entry Decision, the Option to Delay Entry, and Business Cycles
No auwp2023-04, Auburn Economics Working Paper Series from Department of Economics, Auburn University
I show that firms' ability to postpone entry has important implications for our understanding of the observed business cycle behavior of start-ups. I use a model that closely replicates the main features of the US firm dynamics to explore and quantify the mechanism. I find that the option to wait endogenously generates a countercyclical opportunity cost of entry: during recessions, a higher risk of failure increases the value of waiting, hence the cost of entry. The mechanism increases the elasticity of entrants to aggregate shocks five times. It is responsible for three-fourths of the observed persistent differences in the recessionary and expansionary cohorts' productivity, survival, and employment. Without the channel, existing models require either large shocks that generate excessive aggregate fluctuations or exogenous mechanisms to reconcile the observed dynamics of entrants. Overlooking this channel may also result in misleading predictions about entrants' responses to different shocks or policies.
Keywords: Entry Decision; Delay; Option Value; Firm Dynamics; Business Cycles (search for similar items in EconPapers)
JEL-codes: D25 E22 E23 E32 E37 L25 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge, nep-ent, nep-ind and nep-mac
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Working Paper: Entry Decision, the Option to Delay Entry, and Business Cycles (2020)
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