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The cyclicality of entry and exit: The role of imperfect information

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  • Woo, Jinhee

Abstract

In the U.S. manufacturing sector, the entry margin is strongly procyclical, whereas the exit margin is acyclical. This study attempts to explain the entry-exit margin asymmetry. It introduces imperfect information in an industry equilibrium model and finds that potential entrants cannot disentangle aggregate productivity from their own productivity, inducing a signal extraction problem. With imperfect information on the aggregate productivity, potential entrants underestimate variations in equilibrium factor prices and overestimate variations in the value of entering. This amplified entry margin, combined with a reasonable amount of general equilibrium forces, mute cyclical variations in the exit margin. With the proposed mechanism, the model economy generates 28% of the observed variations in the entrants’ productivity. Notably, several testable implications of the model economy are consistent with the properties of the U.S. data.

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  • Woo, Jinhee, 2022. "The cyclicality of entry and exit: The role of imperfect information," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    • Handle: RePEc:eee:dyncon:v:137:y:2022:i:c:s0165188922000409
    DOI: 10.1016/j.jedc.2022.104335
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    More about this item

    Keywords

    Entry and exit; Plant dynamics; Business cycles; Imperfect information;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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