Endogenous Entry, Product Variety, and Business Cycles

52 Pages Posted: 30 Nov 2007 Last revised: 16 Oct 2022

See all articles by Florin Bilbiie

Florin Bilbiie

Université Paris I Panthéon-Sorbonne

Fabio Pietro Ghironi

University of Washington

Marc J. Melitz

Centre for Economic Policy Research (CEPR); Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 2007

Abstract

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.

Suggested Citation

Bilbiie, Florin O. and Ghironi, Fabio Pietro and Melitz, Marc J. and Melitz, Marc J., Endogenous Entry, Product Variety, and Business Cycles (November 2007). NBER Working Paper No. w13646, Available at SSRN: https://ssrn.com/abstract=1037170

Florin O. Bilbiie

Université Paris I Panthéon-Sorbonne ( email )

12 place du Panthéon
Paris, 75005
France

Fabio Pietro Ghironi

University of Washington ( email )

Department of Economics
Box 353330
Seattle, WA 98195-3330
United States
206-543-5795 (Phone)

HOME PAGE: http://faculty.washington.edu/ghiro

Marc J. Melitz (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-8297 (Phone)
617-417-6536 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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