Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society
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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Economic Policies with Endogenous Entry and Exit of Plants

Vol.29, No.2, June , 28–47



  •   (Sogang University)

  •   (Georgetown University)

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Abstract  

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 firingtaxincreasethevolatilityoftheentryrateandaggregateoutput. Thisfindingcontrastswiththestabilizationeffectsoffiringtaxesinpreviousmodelswith 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.


Keywords
   plant-level dynamics, entry and exit, business cycles, firing tax, entry subsidy

JEL classification codes
   E23, E32, L11, L60
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