Entry, Exit, Firm Dynamics, and Aggregate Fluctuations

38 Pages Posted: 12 Jul 2013 Last revised: 8 Oct 2014

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

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Date Written: July 2013

Abstract

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.

Suggested Citation

Clementi, Gian Luca and Palazzo, Berardino, Entry, Exit, Firm Dynamics, and Aggregate Fluctuations (July 2013). NBER Working Paper No. w19217, Available at SSRN: https://ssrn.com/abstract=2292837

Gian Luca Clementi (Contact Author)

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Berardino Palazzo

Board of Governors of the Federal Reserve System ( email )

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