Firm Learning and Growth

We develop a general equilibrium model of firm growth with learning about unobserved demand. Our framework introduces learned (Jovanovic, 1982) into a monopolistically competitive environment iwht firm productivity heterogeneity, á la Melitz (2003). The model correctly predicts that firm growth rates decrease with age, hoding size constant, a fact that models focusing on idiosyncratic productivity shcoks have difficulty matching. We calibrate the model using Colombian plant-level data and find that it matches growth and survival patterns well. Unlike the standard Melitz setup the model with learning is no longer efficient, leaving room for welfare improving policies. We illustrate how subsidies to the fixed costs of young firms can be welfare enhancing: they allow young firms to avoid early exit and thus, benefit consumers through access to a larger number of varieties.