Working Paper: NBER ID: w19217
Authors: Gian Luca Clementi; Berardino Palazzo
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.
Keywords: firm dynamics; aggregate fluctuations; entry and exit; productivity shocks
JEL Codes: D92; E23; E32; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm entry and exit (L26) | propagate the effects of aggregate shocks (F62) |
| aggregate shocks (E10) | persistence of output fluctuations (E32) |
| positive productivity shock (O49) | increase in number of entrants (L26) |
| new firms being smaller and less productive than incumbents (L26) | persistence of aggregate efficiency (E23) |
| surviving entrants become more productive over time (D29) | maintain aggregate efficiency (E10) |
| exit hazard rate declines with age (C41) | impact on firm dynamics (L25) |
| entry rate is procyclical (E32) | sensitivity to aggregate economic conditions (E30) |
| exit rate is countercyclical (E32) | sensitivity to aggregate economic conditions (E30) |
| model without entry or exit (E10) | higher first-order autocorrelation of aggregate productivity shocks (O49) |