Entry decision, the Option to Delay Entry, and Business Cycles

103 Pages Posted: 26 Apr 2023

See all articles by ia Vardishvili

ia Vardishvili

Auburn University - Department of Economics

Date Written: April 1, 2023


I show that firms' ability to postpone entry has important implications for our understanding of the observed business cycle behavior of start-ups. I use a model that closely replicates the main features of the US firm dynamics to explore and quantify the mechanism. I find that the option to wait endogenously generates a countercyclical opportunity cost of entry: during recessions, a higher risk of failure increases the value of waiting, hence the cost of entry. The mechanism increases the elasticity of entrants to aggregate shocks five times. It is responsible for three-fourths of the observed persistent differences in the recessionary and expansionary cohorts' productivity, survival, and employment. Without the channel, existing models require either large shocks that generate excessive aggregate fluctuations or exogenous mechanisms to reconcile the observed dynamics of entrants. Overlooking this channel may also result in misleading predictions about entrants' responses to different shocks or policies.

Keywords: Entry Decision, Delay, Option Value, Firm Dynamics, Business Cycles

JEL Classification: D25, E22, E23, E32, E37, L25

Suggested Citation

Vardishvili, ia, Entry decision, the Option to Delay Entry, and Business Cycles (April 1, 2023). Available at SSRN: https://ssrn.com/abstract=4418294 or http://dx.doi.org/10.2139/ssrn.4418294

Ia Vardishvili (Contact Author)

Auburn University - Department of Economics ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States
4349876523 (Phone)
36830-5836 (Fax)

HOME PAGE: http://www.iavardishvili.com/research

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