Firm entry and exit amplify and propagate the effects of aggregate shocks, leading to greater persistence and unconditional variation of aggregate quantities. Following a positive aggregate shock, entry rises. As in the data, entrants are small and their initial impact on aggregate dynamics is negligible. However, as the common productivity component reverts to its unconditional mean, the youngsters that survive grow larger, generating a wider and longer expansion than in a scenario without entry or exit. The model also identifies a causal link between the drop in establishments at the outset of the Great Recession and the subsequent slow recovery.
Clementi, Gian Luca, and Berardino Palazzo.
"Entry, Exit, Firm Dynamics, and Aggregate Fluctuations."
American Economic Journal: Macroeconomics,
Firm Behavior: Theory
Intertemporal Firm Choice, Investment, Capacity, and Financing
Investment; Capital; Intangible Capital; Capacity
Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Business Fluctuations; Cycles
Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
Production, Pricing, and Market Structure; Size Distribution of Firms