Firm Heterogeneity, Endogenous Entry, and the Business Cycle

29 Pages Posted: 21 Sep 2011 Last revised: 19 Feb 2023

See all articles by Gianmarco I.P. Ottaviano

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation

Date Written: September 2011

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.

Suggested Citation

Ottaviano, Gianmarco I.P., Firm Heterogeneity, Endogenous Entry, and the Business Cycle (September 2011). NBER Working Paper No. w17433, Available at SSRN: https://ssrn.com/abstract=1931205

Gianmarco I.P. Ottaviano (Contact Author)

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation ( email )

Via Gobbi 5
Milan, 20136
Italy

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
27
Abstract Views
617
PlumX Metrics