Model Of Firm Dynamics Research Articles

Demographic Origins of the Start-up Deficit

We propose a simple explanation for the long-run decline in the US start-up rate. It originates from a slowdown in labor supply growth since the late 1970s, largely predetermined by demographics. This channel can explain roughly half of the decline and why incumbent firm survival and average growth over the life cycle have changed little. We show these results in a standard model of firm dynamics and test the mechanism using cross-state variation in labor supply growth. Finally, we show that a longer entry rate series imputed using historical establishment tabulations rises over the 1960s–1970s period of accelerating labor force growth. (JEL D22, D25, E24, J11, J22, J23, M11)

Uncertainty, imperfect information, and expectation formation over the firm’s life cycle

Using a long panel data set on Japanese firms, we find that firms make more precise forecasts and less autocorrelated forecast errors as they gain more experience. Then, we build a firm dynamics model where firms gradually learn about their demand by using a noisy signal. Using expectations data over time, we cleanly isolate the learning mechanism from other mechanisms and find that it accounts for 20%–40% of the overall decline in forecast errors over the life cycle. Productivity gains from removing information frictions range from 3% to 12%, with firm entry and exit playing prominent roles.

How to Use Microdata for Macro-Finance

Financial frictions generate misallocation of resources across firms by restricting productive firms’ access to capital. This article reviews the literature that estimates the aggregate losses generated by such misallocation. The first approach relies on structural estimations: A model of firm dynamics with financial frictions is typically estimated and used to compare efficiency in the actual economy with a counterfactual with perfect financial markets. We argue that robustness is a central concern for this structural literature and discuss ways to analyze robustness in structural estimation (using well-identified moments and analyzing sensitivity to moments). The second approach relies on sufficient statistics, namely formulas that measure misallocation using simple empirical statistics and that are valid for a class of models. We discuss key contributions in that space, the generality of this approach, and the conditions under which it is valid. Sufficient statistic approaches are simpler and more robust, but they come at a cost: The range of counterfactual analyses that can be explored is more limited.

Block-recursive equilibria in heterogeneous-agent models

Equilibrium models with heterogeneous agents and aggregate uncertainty are difficult to analyze since policy functions and market prices usually depend on the cross-sectional distribution over agents' state variables which is a high-dimensional object. This paper considers a general model framework in which this curse of dimensionality does not arise because equilibrium prices are determined by market entry conditions and are independent of the cross-sectional distribution (block-recursive equilibrium). The paper first establishes existence and ergodic theorems which are useful for the theoretical analysis and numerical implementation of block-recursive equilibria. Then these results are applied to models of firm dynamics with competitive or frictional input markets and to incomplete-market economies with endogenous asset market participation.

Schumpeter meets Goldilocks: the scarring effects of firm destruction.

This paper uncovers an inverted U-shaped relationship between firm exit and total factor productivity (TFP) growth using Spanish data. At low levels of firm exit, Schumpeterian cleansing effects dominate and the effect of firm destruction on TFP is positive, but when exit rates are very high, this effect turns negative. In order to rationalize this finding, we build on Asturias et al. (Firm entry and exit and aggregate growth, Technical report, National Bureau of Economic Research, 2017) and develop a model of firm dynamics with exit spillovers calibrated to match the nonlinearity found in the data. This reduced-form spillover captures amplification effects from very high destruction rates that might force viable firms to exit, for example, due to disruptions in the production network and a generalized contraction in credit supply. Armed with the calibrated model, we perform counterfactual scenarios depending on the severity of the shock to firm's outcomes. We find that when the shock is mild and firm destruction rates at impact are similar to those observed during the Global Financial Crisis (GFC), TFP growth increases, and the recovery is faster. However, when the shock is severe and firm exit is well above that of the GFC, TFP growth decreases, since high-efficiency firms are forced out of the market, which makes the recovery much slower.

Returns to scale, firm entry, and the business cycle

In the U.S. data, aggregate financial conditions play an important role in accounting for the formation of firms with high returns to scale. A version of a firm dynamics model with financial frictions and the ability of potential entrepreneurs to choose their returns to scale can match the data. In the estimated model, financial frictions slow the rate at which businesses with high returns to scale grow disproportionately; this discourages such firms from entering during recessions. The “missing generation” of firms with high returns to scale delays recoveries in the aftermath of economic crises. +

The resource reallocation effect of monetary policy

AbstractThis paper studies the heterogeneous responses of firms to monetary policy shocks and the possible adverse effect of expansionary monetary policy on resource reallocation. Using Chinese firm‐level data, we find that when expansionary monetary shock hits the economy, less productive firms are more responsive than productive firms in terms of resource accumulation. We identify two mechanisms for this effect. First, less productive firms accumulate net worth more slowly. They have higher leverage ratio and are more sensitive to monetary policy changes (the intensive margin). Second, monetary expansion relaxes borrowing constraints, which enables unproductive firms to survive. The congestion effect prevents resources from allocating to more productive firms. Our finding is robust even if we use private firm subsamples or avoid the massive fiscal stimulus in China around 2009. We provide a simple model of firm dynamics to capture these effects.

Unobserved heterogeneity in the productivity distribution and gains from trade

AbstractFinding a good parametric approximation to the productivity distribution is a problem of general interest. This paper argues that heterogeneity in productivity is best captured by finite mixture models (FMMs). FMMs build on the existence of unobserved subpopulations in the data. As such, they are generally consistent with models of firm dynamics differing between groups of firms and allow for a very flexible distribution fit. Relative to commonly used parametric alternatives, we find that FMMs are the only distributions able to provide a sufficiently good fit to the data. A gains from trade exercise with Portuguese data reveals that only FMMs approximate the “true” gains reasonably well.

Firm dynamics and SOE transformation during China’s Economic Reform

We study the reform of China’s state-owned enterprises (SOE) with a focus on the corporatization of SOEs. We first document the empirical patterns of the “grasp the large and let go of the small” policy. To quantify the implications of the reform for aggregate output and TFP, we build a three-sector firm dynamics model featuring financial frictions and endogenous firm-type choices. Our calibrated model shows that the SOE reform can increase long-run TFP by encouraging the exit of the least efficient firms in the state sector, but the magnitude of TFP growth also depends on the efficiency in capital reallocation. In the short run, corporatization increases aggregate output and TFP because it allows the most productive SOEs to have a higher borrowing capacity than they would under privatization.

FIRM EXPORT DYNAMICS AND THE EXCHANGE RATE: A QUANTITATIVE EXPLORATION

AbstractThis article provides a theoretical model of firm dynamics that replicates the export elasticity values estimated in the empirical literature, and the heterogeneous response of firms. The analysis of alternative versions of the model allows for a decomposition of the contributions of the different mechanisms (distribution costs, imported intermediate inputs, gradual growth of foreign demand, and market access costs in foreign/domestic currency). Distribution costs represent the most important factor to replicate elasticity estimations. Furthermore, distribution costs allow the model to replicate the heterogeneous response of exports to exchange rate movements by decreasing the demand elasticity of more productive firms.

Entry Barriers, Idiosyncratic Distortions, and the Firm Size Distribution

This paper studies the interaction between barriers to firm entry and distortions to allocative efficiency in a standard model of firm dynamics. We derive a strategy to infer entry barriers based on cross-country differences in the firm size distribution and idiosyncratic distortions. The inferred barriers resemble regulation-based indicators in advanced economies but are substantially higher in middle- and low-income countries. Regulation-based indicators cannot account for cross-country differences in average firm size and underestimate the aggregate productivity gains associated with their removal by up to 8 percent on average. (JEL D21, D24, H25, L11, L60)

Aggregate effects of firing costs with endogenous firm productivity growth

AbstractThis article quantifies the aggregate effects of firing costs in a model of firm dynamics where firm-level productivity is determined by innovation. In the model, the productivity distribution is endogenous, and thus, potentially affected by policy changes, allowing the model to capture both the static (allocative efficiency) and dynamic effects (changes in the distribution of firms’ productivity) of firing costs. The model is calibrated to match key features of firms’ hiring and firing behavior using firm-level data from Spanish nonfinancial firms. I show that firing costs equivalent to 2.5 monthly wages produce a 4% loss in aggregate productivity relative to the frictionless economy. The aggregate productivity losses rise to more than 10% when firing costs are equivalent to 1 year’s wage. I show that a model with a standard AR(1) productivity process can only generate between 45 and 50% of these losses. Overall, the results suggest that ignoring the effects of frictions on the dynamics of firms’ productivity can substantially underestimate their effects.

The role of corporate taxes in the decline of the startup rate

AbstractThe US has experienced a joint decline in corporate tax rates and startup rates in recent decades. We study how changes in corporate taxes affect startup rates in a firm dynamics model with occupational choice. A change in profit taxes has ambiguous effects on firm selection, and therefore on the startup rate. Quantitatively, the observed fall in US corporate tax rates generates, at most, one‐fifth of the startup rate decline. Sensitivity analysis suggests that this number is best interpreted as an upper bound, indicating that corporate taxes did not play a major role in the startup rate decline.

Boom Town Business Dynamics

The U.S. shale oil and gas boom provides a unique opportunity to study economic growth in a “boom town” environment, derive insights about labor market expansions more generally, and identify the causal effects of economic growth on specific margins of business adjustment. Creation of new establishments—separate from expansion of existing establishments—accounts for a disproportionate share of the multi-industry employment growth sparked by the shale boom, an intuitive but not inevitable empirical result that is consistent with models of firm dynamics. New firms, in particular, contribute nearly half of the cumulative employment growth resulting from the shale boom.

Firm and Worker Dynamics in a Frictional Labor Market

This paper integrates the classic theory of firm boundaries, through span of control or taste for variety, into a model of the labor market with random matching and on‐the‐job search. Firms choose when to enter and exit, whether to create vacancies or destroy jobs in response to shocks, and Bertrand‐compete to hire and retain workers. Tractability is obtained by proving that, under a parsimonious set of assumptions, all worker and firm decisions are characterized by their joint surplus, which in turn only depends on firm productivity and size. The job ladder in marginal surplus that emerges in equilibrium determines net poaching patterns by firm characteristics that are in line with the data. As frictions vanish, the model converges to a standard competitive model of firm dynamics. The combination of firm dynamics and search frictions allows the model to: (i) quantify the misallocation cost of frictions; (ii) replicate elusive life‐cycle growth profiles of superstar firms; and (iii) make sense of the failure of the job ladder around the Great Recession as a result of the collapse of firm entry.

Firm entry and exit during recessions

We analyze aggregate shocks in a general equilibrium model of firm dynamics with entry and exit and financial frictions. Compared to the productivity shock, a shock to the collateral constraint (credit shock) generates a larger change in firm entry and exit. Calibrating the credit and productivity shocks to the Great Recession, we find that the credit shock accounts for lower entry, higher exit, and the concentration of exit among young firms during the Great Recession. The changes in entry and exit account for 19 and 24 percent of the fall in output and hours, respectively. Furthermore, we discuss how the modeling of potential entrants matters for the quantitative results, and perform a COVID-19 lockdown experiment.

Entry, Variable Markups, and Business Cycles

<ns3:p>The creation of new businesses declines in recessions. In this paper, I study the effects of pro-cyclical business formation on aggregate employment in a general equilibrium model of firm dynamics. The key features of the model are that the elasticity of demand faced by firms falls with their market share and that adjustment costs slow the reallocation of employment between firms. In response to a decline in entry, incumbent firms' market shares increase, their elasticity of demand falls, and they increase their markups and reduce employment. To quantify the model, I study the relationship between variable input use and revenue in panel data on large firms. Viewed through the lens of my model, my estimates imply that for large firms, the within-firm elasticity of the markup to relative sales is 25 percent. I use the calibrated model to study shocks to entry, finding that a fall in entry can lead to a significant contraction in employment. A shock to entry that replicates the decline in the number of businesses during the Great Recession generates a prolonged 2.5 percent fall in employment in the model. Finally, I show that the declining correlation between revenue and variable input use over the past 30 years implies that the effect of entry on the business cycle has become stronger over time.</ns3:p>

Entrepreneurial Human Capital and Firm Dynamics

Abstract This article shows that entrepreneurial human capital is a key driver of firm dynamics using administrative panel data on the universe of firms and workers in Portugal. Firms started by more educated entrepreneurs are larger at entry and exhibit higher life cycle growth. Consistent with an effect on growth, the thickness of the right tail of the size distribution increases with entrepreneur schooling. The evidence points to several underlying mechanisms, with technology adoption playing the most important part. I develop and estimate a model of firm dynamics that can parsimoniously account for these findings and use it to draw aggregate implications. Accounting for the effect of entrepreneurial human capital on firm dynamics can substantially increase aggregate returns to schooling and the fraction of cross-country income differences explained by human and physical capital.

From employee to entrepreneur: Learning, employer size, and spinout dynamics

Most new firms are founded by former employees of existing firms – spinouts. This paper explores how existing firms shape the entry and post-entry dynamics of spinouts and studies the aggregate implications of this relationship. Using micro-data from Mexico, I show that employees from small firms are more likely to form spinouts than employees of large firms. In addition, spinouts from large employers start at a larger scale and grow faster than spinouts from small employers. To reconcile these patterns, I develop a model of occupational choice and firm dynamics in which employees can learn from their employers. Using a calibrated version of the model, I analyze the implications of the link between employer size and spinout dynamics for macroeconomic outcomes within and across economies. I argue that learning efficiency – interpreted as management quality – is not only salient for understanding cross-country differences in spinout entry but also variation in the firm size distribution and output per worker. I also show that employee learning has meaningful and long-lasting implications for the creation of new firms and for workers in response to policies that target existing firms. Taken together, this paper establishes a connection between incumbent and entrant firms and shows that it is important for aggregate outcomes.

The age distribution of business firms

We investigate upon the shape and the determinants of the age distribution of business firms. By employing a novel dataset covering the population of French businesses, we highlight that a geometric law provides a reasonable approximation for the age distribution. However, relevant systematic deviations and sectoral heterogeneity appear. We develop a stochastic model of firm dynamics to explain the mechanisms behind this evidence and relate them to business dynamism. Results reveal a long-term decline in entry rates and lower survival probabilities of young firms. Our findings bear important implications for aggregate outcomes, notably employment growth.