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A Firm's First Year

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Author Info
Jaap H. Abbring () (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)
Jeffrey R. Campbell () (Federal Reserve Bank of Chicago)

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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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Publisher 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;

Find related papers by JEL classification:
C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Recreation; Tourism

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jaap Abbring & James Heckman, 2008. "Dynamic policy analysis," CeMMAP working papers CWP05/08, Centre for Microdata Methods and Practice, Institute for Fiscal Studies. [Downloadable!]
  2. Arnab Bhattacharjee, 2005. "Models of Firm Dynamics and the Hazard Rate of Exits: Reconciling Theory and Evidence using Hazard Regression Models," Econometrics 0503021, EconWPA. [Downloadable!]
    Other versions:
  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. [Downloadable!]
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