Staff Report 544

Firm Entry and Exit and Aggregate Growth

Jose Asturias
Sewon Hur | Federal Reserve Bank of Cleveland
Timothy J. Kehoe | Consultant
Kim J. Ruhl

Published February 21, 2017

Using data from Chile and Korea, we find that a larger fraction of aggregate productivity growth is due to firm entry and exit during fast-growth episodes compared to slow-growth episodes. Studies of other countries confirm this empirical relationship. We develop a model of endogenous firm entry and exit based on Hopenhayn (1992). Firms enter with efficiencies drawn from a distribution whose mean grows over time. After entering, a firm’s efficiency grows with age. In the calibrated model, reducing entry costs or barriers to technology adoption generates the pattern we document in the data. Firm turnover is crucial for rapid productivity growth.

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