Hugo Hopenhayn from UCLA will present "Transitions in a Multisector model of Firm Dynamics" ∗joint with Julian Neira and Rish Singhania

Abstract: This paper develops a multisector model of firm entry-exit and growth, with endogenous firm selection. We provide conditions under which firm values are independent of the aggregate state. This property allows equilibrium prices and firm entry to be determined period-by-period, enabling characterization of transitional dynamics in settings with non-stationary aggregate and sectoral shocks. When age-profiles of size and exit differ across sectors, sectoral entry depends not only on its own history, but also on past entry in all other sectors. We apply the framework to study the decline of U.S. manufacturing. Quantitatively, changes in sectoral technology play a dominant role in the decline of manufacturing employment, while changes in international trade primarily drive the decline in the number of manufacturing firms—a decline that would have been more severe in the absence of population growth changes. Transitional dynamics due to changes in the firm age distribution account for half of the decline.