Entry, Exit and Plant-Level Dynamics over the Business Cycle
Federal Reserve Bank of Cleveland
University of Virginia - Economics; CIREQ
January 1, 2008
FRB of Cleveland Working Paper No. 07-18R
US Census Bureau Center for Economic Studies Paper No. CES-WP- 08-17
This paper analyzes the implications of plant-level dynamics over the business cycle. We first document basic patterns of entry and exit of U.S. manufacturing plants, in terms of employment and productivity, between 1972 and 1997. We show how entry and exit patterns vary during the business cycle, and that the cyclical pattern of entry is very different from the cyclical pattern of exit. Second, we build a general equilibrium model of plant entry, exit, and employment and compare its predictions to the data. In our model, plants enter and exit endogenously, and the size and productivity of entering and exiting plants are also determined endogenously. Finally, we explore the policy implications of the model. Imposing a firing tax that is constant over time can destabilize the economy by causing fluctuations in the entry rate. Entry subsidies are found to be effective in stabilizing the entry rate and output.
Number of Pages in PDF File: 53
Keywords: plant-level dynamics, entry and exit, business cycles
JEL Classification: E23, E32, L11, L60working papers series
Date posted: July 25, 2008
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