The Importance of Entry in the Business Cycle: What Are the Roles of Markups, Adjustment Costs, and Heterogeneity?

Abstract

In this paper, I evaluate the role of fluctuations in business formation in amplifying business cycles. To do this, I study the response of employment to shocks in a general equilibrium model of producer dynamics with entry and exit. The model features producer heterogeneity, adjustment frictions, and a variable demand elasticity. I find that while heterogeneity reduces the effects of entry on the broader economy, the variable demand elasticity and adjustment frictions amplify these effects, so that entry fluctuations lead to economically meaningful amplification of business cycle shocks.