Economic Policies with Endogenous Entry and Exit of Plants

We build a general equilibrium model of industry dynamics and conduct policy experiments. The model is designed to match the entry and exit patterns in the U.S. manufacturing sector. We analyze two policies. First, we consider imposing a firing tax. Both a constant firing tax and a countercyclical firing tax increase the volatility of the entry rate and aggregate output. This finding contrasts with the stabilization effects of firing taxes in previous models with exogenous entry and exit. Second, we consider subsidies to entry costs. Countercyclical entry subsidies stabilize the entry rate and are effective in stabilizing the aggregate output over the business cycle.