Entry, Exit and Productivity: Empirical Results for German Manufacturing Industries

From a model by Hopenhayn, three hypotheses can be derived: (H1) Firms that exit in year t were less productive in t-1 than firms that continue to produce in t. (H2) Firms that enter in year t are less productive than incumbent firms in year t. (H3) Surviving firms from an entry cohort were more productive than nonsurviving firms from this cohort in the start year. This paper uses unique newly available panel datasets for all manufacturing plants from Germany (1995 - 2002) to test these hypotheses. All three hypotheses are supported empirically for West and East Germany.