CFCM Seminar: Rish Singhania (University of Exeter)

Abstract: The US economy has experienced declining business dynamism alongside substantial sectoral reallocation, particularly the decline of manufacturing. We develop a multisector model of firm entry-exit and growth, with endogenous firm selection, to jointly investigate these phenomena. The model features feedback effects from firm demographics–—age profiles of exit rates and average firm size–—in response to aggregate and sectoral shocks. We establish equilibrium existence and uniqueness, and characterize transitional dynamics. Quantitatively, we evaluate the role of three forces driving manufacturing’s decline: population growth, sectoral technology, and international trade. The model replicates key patterns of firm dynamics and sectoral reallocation in the data, including manufacturing’s employment share declining from 26% to 9% and firm share from 7.4% to 4.3%. Transitional dynamics generated by changes in the firm-age distribution account for one-half of the firm share decline explained by all three forces combined. Population growth changes are essential to explain firm entry-exit patterns in both manufacturing and nonmanufacturing. Sectoral technology explains two-thirds of manufacturing employment decline, while trade drives the decline in the manufacturing firm share.