Wednesday, January 09, 2008

Creative entry 

It is commonly believed that business cycles �cleanse� industry with waves of creative destruction. New research shows that entry is higher in booms than busts, but exit rates and the type of exiting firms, are steady over the cycle. Plants entering during recessions, however, are larger and more productive ��creative entry� rather than �creative destruction�.
From a synopsis of a new paper by Yoonsoo Lee and Toshihiko Mukoyama, with a synopsis at VoxEU. In short, troughs are accompanied by lots of new entry. The paper itself suggests that a subsidy for hiring new workers during recessions will help stabilize output. Ideas become more prevalent during expansions and more expensive, so lots of firms can enter into a market when a boom occurs. Those with new ideas will find it harder to implement them during a recession, thus making the subsidy desirable.