Establishment creation and destruction across business density cycles: US evidence

Abstract

This paper investigates how business establishment entry and exit are affected by cycles in business density. We assess how entry/exit behave when markets over and under shoot a dynamic equilibrium number of businesses and whether these effects differ between manufacturing and service industries. Overall, we find persistent cycles where the actual number of business establishments is typically not equal to the dynamic equilibrium number even though it gravitates towards it. We uncover a systematic pattern which indicates that in disequilibrium entry is dis-equilibrating while closure is equilibrating. For example, the entry rate plays a dis-equilibrating role by accelerating in an overshoot, however as exits accelerate even faster in an overshoot they help move the industry towards an equilibrium. Overall, the results indicate that entrepreneurs and corporations operate with a herd instinct thereby increasing establishments in a cyclical business density over shoot and decreasing them in an under shoot. In terms of economic policy, the results question whether government policy aimed at promoting business creation and expansion ought to have a counter business density cyclical dimension. In other words, should business start-up and growth be promoted more strongly in business density under shoots than over shoots?