Entry, Exit, Firm Dynamics, and Aggregate Fluctuations
Do firm entry and exit play a major role in shaping aggregate dynamics? Our answer is yes. Entry and exit propagate the effects of aggregate shocks. In turn, this results in greater persistence and unconditional variation of aggregate time-series. These are features of the equilibrium allocation in Hopenhayn (1992)'s model of equilibrium industry dynamics, amended to allow for investment in physical capital and aggregate fluctuations. In the aftermath of a positive productivity shock, the number of entrants increases. The new firms are smaller and less productive than the incumbents, as in the data. As the common productivity component reverts to its unconditional mean, the new entrants that survive become more productive over time, keeping aggregate efficiency higher than in a scenario without entry or exit.
We are grateful to Dave Backus, Rudi Bachman, Susanto Basu, Russel Cooper, Jason Faberman, Shigeru Fujita, Ramon Marimon, Gianluca Violante, and Stan Zin, as well seminar attendants at Boston College, Boston University, European University Institute, Richmond Fed, New York University, University of Southern California, University of Texas at Austin, University of Virginia, University of Western Ontario, SED meeting, Canadian Macroeconomics Study Group, CREI-MOVE Workshop on Misallocation and Productivity, Greenline Macroeconomics Meeting, NY/Philly Macroeconomics Workshop, and Workshop on Macroeconomic Dynamics for their comments and suggestions. All remaining errors are our own responsibility. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
"Entry, Exit, Firm Dynamics, and Aggregate Fluctuations." American Economic Journal: Macroeconomics, forthcoming. With Dino Palazzo.