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Entry Decision, the Option to Delay Entry, and Business Cycles

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  • Ia Vardishvili

Abstract

I show that firms' ability to delay entry generates a countercyclical opportunity cost of entry and significantly amplifies the effect of the initial aggregate conditions on the selection of entrants. This mechanism enables existing firm dynamics models to reconcile the documented business cycle dynamics of US entrant establishments without leading to an excessive variation in economic aggregates. I find the observed variation of firms at entry is responsible for around three-fourths of the business cycle fluctuations. Finally, I argue that not accounting for the option to delay entry may result in misleading predictions about entrants' responses to different shocks or policies.

Suggested Citation

  • Ia Vardishvili, 2020. "Entry Decision, the Option to Delay Entry, and Business Cycles," Auburn Economics Working Paper Series auwp2020-07, Department of Economics, Auburn University.
    • Handle: RePEc:abn:wpaper:auwp2020-07
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    References listed on IDEAS

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    2. Smirnyagin, Vladimir, 2023. "Returns to scale, firm entry, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 134(C), pages 118-134.

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    More about this item

    Keywords

    Option value; entry; firm dynamics; business cycles; propagation; Great Recession;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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