Abstract: Establishments that start operating during recessions employ fewer workers at entry and over time, although these establishments are, on average, more productive. I show that standard firm-dynamics models, that rely on neoclassical entry decision rule and fixed entry cost, do not account for these facts without generating excessive volatility in aggregate variables. I find that allowing potential entrants to postpone entry after observing the aggregate state generates countercyclical opportunity cost of entry in equilibrium and leads to observed significant selection of entrants over the cycles. Procyclical variation in the survival rates moderate the relationship: during recessions increased risk of post-entry failure creates positive value of waiting and increases sunk cost of entry up to 7%, which corresponds to delays that could last up to 8 years. I find that entrants that delay entry accounts more than 80% of the observed variation in the number and composition of entrants. Interestingly, I also find that a model that accounts for the life-cycle dynamics of U.S. establishments explains more than two-thirds of the business-cycle fluctuations in aggregate employment and output. Finally, I show that the option to delay entry has important policy implications and could significantly alter existing firm dynamics models predictions about the response of potential entrants to various policies.
Keywords: Option value of delay, entry, firm-dynamics, business cycles, Great Recession
JEL Codes: D25, E22, E23, E32, E37, L25