Working Paper: NBER ID: w17433
Authors: Gianmarco I.P. Ottaviano
Abstract: This paper investigates the role that the entry and exit of heterogeneous firms plays in shaping aggregate fluctuations in economic activity. In so doing, it develops a dynamic stochastic general equilibrium model in which procyclical entry and countercyclical exit along a real business cycle lead to endogenous cyclical movements in average firm productivity. These movements stem from a composition effect due to the reallocation of market shares among firms with different levels of efficiency and affect the propagation of exogenous technological shocks. Numerical analysis suggests that existing models with representative firms may overstate the actual role of procyclical entry and exit in imperfectly competitive markets as a propagation mechanism of exogenous technology shocks. The reason is that procyclical entry and countercyclical exit disproportionately involve less efficiency firms whose impact on aggregate economic activity is hampered by their smaller size.
Keywords: No keywords provided
JEL Codes: E20; E32; L11; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| procyclical entry (E32) | endogenous cyclical movements in average firm productivity (O41) |
| countercyclical exit (E32) | endogenous cyclical movements in average firm productivity (O41) |
| procyclical entry and countercyclical exit (E32) | composition effect affecting aggregate productivity (E23) |
| reallocation of market shares among firms with varying efficiencies (L11) | endogenous cyclical movements in average firm productivity (O41) |
| less efficient firms (D22) | diminished overall impact on aggregate economic activity (F69) |
| existing models with representative firms (C59) | overstate role of dynamics in propagation of exogenous technology shocks (F41) |