A model of entry, exit, and plant-level dynamics over the business cycle

Abstract

We build a general equilibrium model of plant-level dynamics to quantitatively analyze the entry and exit of manufacturing plants over the business cycle. The baseline model, which is a direct extension of Hopenhayn and Rogerson (1993) model of industry dynamics, can account for the macroeconomic rates of entry and exit over the business cycle observed in the U.S. data. It cannot, however, account for the microeconomic characteristics of entering plants. Assuming that entry costs are cyclical can resolve this inconsistency between the model and the data. We also show that this pattern of entry costs can arise from an endogenous mechanism. The business cycle results are robust when we extend the model to incorporate plant life cycle features.