Multisector Firm Dynamics along Transitions.

Résumé

This paper develops a multisector model of firm entry, exit, and growth. We provide conditions under which firm values are independent of the aggregate state. This property allows equilibrium prices and firm entry to be solved period by period, enabling analysis of transitional dynamics in settings with non-stationary aggregate shocks. When age profiles of size and exit differ across sectors, sectoral entry depends not only on its own sector's history of entry, but on the history of entry of all sectors. We apply the framework to study the decline of U.S. manufacturing. Changes in technology play a dominant role in the decline of manufacturing employment, while changes in trade primarily drive the decline in the number of manufacturing firms—a decline that would have been even more severe in the absence of changes in population growth. Transitional dynamics due to changes in the firm age distribution account for half of the decline. (Joint with Hugo Hopenhayn (UCLA) and Rish Singhania (Exeter).)