Entry, Exit, Firm Dynamics, and Aggregate Fluctuations

34 Pages Posted: 10 May 2011

See all articles by Gian Luca Clementi

Gian Luca Clementi

New York University - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER); University of Bologna - Rimini Center for Economic Analysis (RCEA)

Berardino Palazzo

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: September 4, 2010

Abstract

How important are firm entry and exit in shaping aggregate dynamics? We address this question by characterizing the equilibrium allocation in Hopenhayn (1992)’s model of equilibrium industry dynamics, amended to allow for investment in physical capital and aggregate fluctuations. We find that entry and exit propagate the effects of aggregate shocks. In turn, this results in greater persistence and unconditional variation of aggregate time-series. 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 progressively more productive, keeping aggregate efficiency higher than in a scenario without entry or exit. We also find that both the mean and variance of the cross-sectional distribution of firm-level productivity are counter-cyclical, in spite of the assumption that innovations to firm-level productivity are i.i.d. and orthogonal to aggregate shocks. This happens because of selection: the idiosyncratic productivity of the marginal entrant is lower in expansion than during recessions. Since idiosyncratic productivity is mean-reverting, mean and variance of the distribution of productivity growth are pro-cyclical.

Keywords: Selection, Propagation, Persistence, Survival, Reallocation

JEL Classification: D21, D92, E32, L11

Suggested Citation

Clementi, Gian Luca and Palazzo, Berardino, Entry, Exit, Firm Dynamics, and Aggregate Fluctuations (September 4, 2010). Available at SSRN: https://ssrn.com/abstract=1836677 or http://dx.doi.org/10.2139/ssrn.1836677

Gian Luca Clementi (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

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Berardino Palazzo

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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