Entry, Exit and Plant-Level Dynamics over the Business Cycle

FRB of Cleveland Working Paper No. 07-18R

US Census Bureau Center for Economic Studies Paper No. CES-WP- 08-17

53 Pages Posted: 25 Jul 2008

See all articles by Yoonsoo Lee

Yoonsoo Lee

Federal Reserve Bank of Cleveland

Toshihiko Mukoyama

Georgetown University - Department of Economics; CIREQ

Date Written: January 1, 2008

Abstract

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.

Keywords: plant-level dynamics, entry and exit, business cycles

JEL Classification: E23, E32, L11, L60

Suggested Citation

Lee, Yoonsoo and Mukoyama, Toshihiko, Entry, Exit and Plant-Level Dynamics over the Business Cycle (January 1, 2008). FRB of Cleveland Working Paper No. 07-18R, US Census Bureau Center for Economic Studies Paper No. CES-WP- 08-17, Available at SSRN: https://ssrn.com/abstract=1171122 or http://dx.doi.org/10.2139/ssrn.1171122

Yoonsoo Lee (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States

Toshihiko Mukoyama

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

CIREQ

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

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