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A Firm's First Year

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  • Jaap H. Abbring

    ()
    (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

  • Jeffrey R. Campbell

    ()
    (Federal Reserve Bank of Chicago)

Abstract

This paper determines the structural shocks that shape a firm's first year by estimating a structural model of firm growth, learning, and survival using monthly sales histories from 305 Texas bars. We find that heterogeneity in firms' pre-entry scale decisions accounts for about 40% of their sales' variance; persistent post-entry shocks account for most of the remainder. We find no evidence of entrepreneurial learning. Variation of the firms' fixed costs consistent with an annual lease cycle explains their exit rates. We use the estimated model to price a new bar's option to exit, which accounts for 124% of its value.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 05-046/3.

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Date of creation: 12 May 2005
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Handle: RePEc:dgr:uvatin:20050046

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Related research

Keywords: firm exit; option value; fixed costs; Bayesian learning;

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References

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  1. Roberts, Mark J & Tybout, James R, 1997. "The Decision to Export in Colombia: An Empirical Model of Entry with Sunk Costs," American Economic Review, American Economic Association, vol. 87(4), pages 545-64, September.
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  8. Jeffrey Campbell, 2000. "Market Size Matters," Econometric Society World Congress 2000 Contributed Papers 1225, Econometric Society.
  9. Ariel Pakes & Richard Ericson, 1989. "Empirical Implications of Alternative Models of Firm Dynamics," NBER Working Papers 2893, National Bureau of Economic Research, Inc.
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  14. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  15. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1988. "Patterns of Firm Entry and Exit in U.S. Manufacturing Industries," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 495-515, Winter.
  16. Nina Pavcnik, 2000. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," NBER Working Papers 7852, National Bureau of Economic Research, Inc.
  17. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
  18. James Levinsohn & Amil Petrin, 2000. "Estimating Production Functions Using Inputs to Control for Unobservables," NBER Working Papers 7819, National Bureau of Economic Research, Inc.
  19. Bahk, Byong-Hong & Gort, Michael, 1993. "Decomposing Learning by Doing in New Plants," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 561-83, August.
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Citations

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Cited by:
  1. Arnab Bhattacharjee, 2005. "Models of Firm Dynamics and the Hazard Rate of Exits: Reconciling Theory and Evidence using Hazard Regression Models," Econometrics 0503021, EconWPA.
  2. Naude, Wim, 2008. "Entrepreneurship in Economic Development," Working Paper Series RP2008/20, World Institute for Development Economic Research (UNU-WIDER).
  3. Nicolas Roys, 2007. "Optimal investment policy with fixed adjustment costs and complete irreversibility," CeMMAP working papers CWP29/07, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  4. Jaap H. Abbring & Jeffrey R. Campbell, 2009. "Last-In First-Out Oligopoly Dynamics," NBER Working Papers 14674, National Bureau of Economic Research, Inc.
  5. Jaap Abbring & James Heckman, 2008. "Dynamic policy analysis," CeMMAP working papers CWP05/08, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  6. Neus Herranz & Stefan Krasa & Anne Villamil, 2009. "Small firms in the SSBF," Annals of Finance, Springer, vol. 5(3), pages 341-359, June.

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