Endogenous Entry, Product Variety, and Business Cycles

Fabio Ghironi, Marc Melitz and Florin Bilbiie

No 8564, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper builds a framework for the analysis of macroeconomic fluctuations that incorporates the endogenous determination of the number of producers and products over the business cycle. Economic expansions induce higher entry rates by prospective entrants subject to irreversible investment costs. The sluggish response of the number of producers (due to sunk entry costs and a time-to-build lag) generates a new and potentially important endogenous propagation mechanism for real business cycle models. The return to investment (corresponding to the creation of new productive units) determines household saving decisions, producer entry, and the allocation of labor across sectors. The model performs at least as well as the benchmark real business cycle model with respect to the implied second-moment properties of key macroeconomic aggregates. In addition, our framework jointly predicts procyclical product variety and procyclical profits even for preference specifications that imply countercyclical markups. When we include physical capital, the model can simultaneously reproduce most of the variance of GDP, hours worked, and total investment found in the data.

Keywords: Business cycle propagation; Entry; Markups; Product creation; Profits; Variety (search for similar items in EconPapers)
JEL-codes: E20 E32 (search for similar items in EconPapers)
Date: 2011-09
New Economics Papers: this item is included in nep-bec, nep-dge, nep-ent and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Endogenous Entry, Product Variety and Business Cycles (2012)
Working Paper: Endogenous Entry, Product Variety and Business Cycles (2012)
Working Paper: Endogenous Entry, Product Variety and Business Cycles (2012)
Working Paper: Endogenous Entry, Product Variety, and Business Cycles (2012)
Working Paper: Endogenous Entry, Product Variety and Business Cycles (2007)
Working Paper: Endogenous Entry, Product Variety, and Business Cycles (2007)
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