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

Updated version!

Abstract:  I show that firms' ability to postpone entry has important implications for our understanding of the observed business cycle behavior of start-ups. I use a model that closely replicates the main features of the US firm dynamics to explore and quantify the mechanism. I find that the option to wait endogenously generates a countercyclical opportunity cost of entry: During recessions, a higher risk of failure increases the value of waiting, hence the cost of entry. The mechanism increases the elasticity of entrants to aggregate shocks five times. It is responsible for three-fourths of the observed persistent differences in the recessionary and expansionary cohorts' productivity, survival, and employment. Without the channel, existing models require either large shocks that generate excessive aggregate fluctuations or exogenous mechanisms to reconcile the observed dynamics of entrants. Overlooking this channel may also result in misleading predictions about entrants' responses to different shocks or policies.

Presented at:  Boston University 2023,  Wharton 2023, EEA-ESEM 2022, SED 2021, ES World Congress 2020, EEA 2019, EESWM 2019,  Auburn University,  I-85  Macroeconomics Conference 2019,  Midwest Macro at Vanderbilt University 2019, EGSC at Washington University in St. Louis 2019,  GCER Alumni Conference 2019, the Federal Reserve Bank of St. Louis, University of Virginia, Auburn University,  6th Lindau Meeting on Economic Sciences 2018

Sovereign Risk and Economic Activity: The Role of Firm Entry and Exit ~ R&R at JPE Macro
(with Gaston Chaumont and Givi Melkadze)


Abstract: We quantify the role of firm entry and exit in shaping the output costs of sovereign debt crises. Empirically, higher sovereign risk correlates with less firm entry and more exits. We find evidence of a credit-supply channel explaining the sovereign risk-entry relationship but not for the sovereign risk-exit relationship. We develop a model with sovereign risk, financial frictions and endogenous firm dynamics. Calibrated with data around the Portuguese debt crisis, the model predicts that sovereign risk explains 60% of the fall in entry and most of the exit dynamics. The extensive margin explains 80% of the output fall in the long-run.

Presented at: York University 2023,  Kent Macro Workshop 2023, University of Rochester 2022,  Wharton 2022, the Federal Reserve Bank of Atlanta, SEA 2021, MEA 2022, Midwest Macro 2022, NASMES 2022, SED 2022, EEA/ESEM 2022, Lisbon Macro Workshop 2022, LACEA/LAMES 2022, and AEA/ASSA 2023, Auburn University

Endogenous Capital User Costs and Fluctuations in Firm Productivity
(with Eugene Tan and Poorya Kabir)

New version coming soon!
Abstract: We provide direct evidence, using unique data from India, that endogenous capital utilization and maintenance- measures of capital user cost- drive fluctuations in firms' total factor productivity (TFP) and average revenue product of capital (ARPK). Drawing inference from a calibrated neoclassical investment model with capital adjustment frictions and endogenous capital user costs, we uncover three novel results: In India, (i) almost one-third of fluctuations in firm TFP arise from endogenous utilization, (ii) user cost variations amplify dispersion in ARPK but are associated with a 4.0% gain to aggregate productivity, and (iii) elimination of maintenance inefficiencies increases aggregate productivity by 13.6%.

Presented at ASSA 2024, University of North Carolina Chapel Hill 2024, Queen’s University 2024, Western University 2024, Wharton 2023, Lisbon Macro Workshop 2023, Theories and Methods in Macroeconomics (T2M) 2023, National University of Singapore 2023,  University of Toronto  2022

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