Why Are Plant Deaths Countercyclical: Reallocation Timing or Fragility?

Andrew Figura

Working Papers from U.S. Census Bureau, Center for Economic Studies

Abstract: Because plant deaths destroy specific capital with large local economic impacts and potentially important macroeconmic effects, understanding the causes of deaths and, in particular, why they are concentrated in cyclical downturns, is important. The reallocationtiming hypothesis posits that plants suffering adverse permanent demand/productivity shocks delay shutdowns until cyclical downturns when plant capacity is less valuable, while the fragility hypothesis posits that shutdowns occur in downturns because the option value of maintaining the plant through low profitability periods is too small. I show that the effect that a plant’s specific capital has on the timing of plant deaths differs across these two hypotheses and then use this insight to test the hypotheses’ relative importance. I find that fragility is the dominant cause of the countercyclical behavior of plant deaths. This suggests that the endogenous destruction of capital is likely an important amplification and propagation mechanism for cyclical shocks and that stabilization policies have the benefit of reduced capital destruction.

Keywords: Plant deaths; business cycle (search for similar items in EconPapers)
JEL-codes: E20 E22 E32 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2006-11
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://www2.census.gov/ces/wp/2006/CES-WP-06-24.pdf First version, 2006 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:cen:wpaper:06-24

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