Working Paper: NBER ID: w22649
Authors: Andrew B. Bernard; Toshihiro Okubo
Abstract: This paper explores role of product adding and dropping within manufacturing firms over the business cycle. While a substantial body of work has explored the importance of the extensive margins of firm entry and exit in employment and output flows, only recently has research begun to examine the adjustment across products within firms and its importance for firm and aggregate output and employment flows. Using a novel, annual firm-product data set covering all Japanese manufacturing firms with more than 4 employees from 1992 to 2006, we provide the first evidence on annual changes in product adding and dropping by continuing firms over the business cycle. We find very high rates of product adding and dropping by continuing firms between the last year of the recession and the first year of the subsequent expansion and offer an explanation and supporting evidence based on a “trapped factors” model of firm behavior.
Keywords: product switching; business cycle; Japanese manufacturing; firm behavior; economic fluctuations
JEL Codes: E32; L11; L21; L25; L60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| negative demand shocks (E31) | product innovation activities (O31) |
| recessions (E32) | product switching (L15) |
| recession transitions (E32) | product adding and dropping rates (D49) |
| higher sunk costs (G31) | likelihood of product adding and dropping in recessions (E32) |
| product switching (L15) | aggregate output changes (E23) |
| product additions by continuing firms (D25) | aggregate output changes (E23) |
| product drops by continuing firms (L11) | aggregate output changes (E23) |
| recession troughs (E32) | increased rates of product adding and dropping (L11) |