NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Endogenous Entry, Product Variety, and Business Cycles

Florin Bilbiie, Fabio Ghironi, Marc J. Melitz

NBER Working Paper No. 13646
Issued in November 2007
NBER Program(s):   EFG

This paper builds a framework for the analysis of macroeconomic fluctuations that incorporates the endogenous determination of the number of producers 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 the sunk entry costs) generates a new and potentially important endogenous propagation mechanism for real business cycle models. The stock-market price of 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 a procyclical number of producers and procyclical profits even for preference specifications that imply countercyclical markups. When we include physical capital, the model can reproduce the variance and autocorrelation of GDP found in the data.

download in pdf format
   (659 K)

email paper

This paper is available as PDF (659 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w13646

Published: Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304 - 345. citation courtesy of

Users who downloaded this paper also downloaded these:
Ottaviano w17433 Firm Heterogeneity, Endogenous Entry, and the Business Cycle
Melitz w8881 The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity
Bilbiie, Ghironi, and Melitz w14383 Monopoly Power and Endogenous Product Variety: Distortions and Remedies
Chatterjee and Cooper w4562 Entry and Exit, Product Variety and the Business Cycle
Ghironi and Melitz w10540 International Trade and Macroeconomic Dynamics with Heterogeneous Firms
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us