Chair of Innovation, Competition Policy and New Institutional Economics

2014-01

Number
2014-01
Authors
Sven Offick, Roland C. Winkler
Title
Endogenous Firm Entry in an Estimated Model of the U.S. Business Cycle
Abstract A recent theoretical literature highlights the role of endogenous firm entry as an internal amplification mechanism of business cycle fluctuations. The amplification mechanism works through the competition and the variety effect. This paper tests the significance of this amplification mechanism, quantifies its importance, and disentangles the competition and the variety effect. To this end, we estimate a medium-scale real business cycle model with firm entry for the U.S. economy. The parameter governing the competition and variety effect is estimated to be statistically significant. We find that firm entry substantially amplifies output by 8.5 percent. The competition effect accounts for most amplification, whereas the variety effect only plays a minor role.

Keywords: Bayesian Estimation, Business Cycles, Competition Effect, Entry, Mark-ups, Variety Effect

JEL classification: E20, E32
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