Firm Heterogeneity, Endogenous Entry, and the Business Cycle
This paper investigates the role that the entry and exit of heterogeneous firms plays in shaping aggregate fluctuations in economic activity. In so doing, it develops a dynamic stochastic general equilibrium model in which procyclical entry and countercyclical exit along a real business cycle lead to endogenous cyclical movements in average firm productivity. These movements stem from a composition effect due to the reallocation of market shares among firms with different levels of efficiency and affect the propagation of exogenous technological shocks. Numerical analysis suggests that existing models with representative firms may overstate the actual role of procyclical entry and exit in imperfectly competitive markets as a propagation mechanism of exogenous technology shocks. The reason is that procyclical entry and countercyclical exit disproportionately involve less efficiency firms whose impact on aggregate economic activity is hampered by their smaller size.
I am grateful to Bocconi University, Bruegel, FEEM, and the European Commission for financial support. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Gianmarco I. P. Ottaviano, 2012. "Firm Heterogeneity, Endogenous Entry, and the Business Cycle," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 8(1), pages 57 - 86.
Firm Heterogeneity, Endogenous Entry, and the Business Cycle, Gianmarco I. P. Ottaviano. in NBER International Seminar on Macroeconomics 2011, Frankel and Pissarides. 2012