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Models of Firm Dynamics and the Hazard Rate of Exits: Reconciling Theory and Evidence using Hazard Regression Models

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Author Info
Arnab Bhattacharjee ()

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Abstract

This Paper considers empirical work relating to models of firm dynamics. It is shown that a hazard regression model for firm exits, with a modification to accommodate age-varying covariate effects, provides an adequate framework accommodating many of the features of interest in empirical studies on firm dynamics. Modelling implications of some of the popular theoretical models are considered and a set of empirical procedures for verifying theoretical implications of the models are proposed.The proposed hazard regression models can accommodate negative effects of initial size that increase to zero with age (active learning model), negative initial size effects that may increase with age, but stay permanently negative (passive learning model), conditional and unconditional hazard rates that decrease with age at higher ages, and adverse effects of macroeconomic shocks that decrease with age of the firm.The methods are illustrated using data on quoted UK firms. Consistent with the active learning model, the effect of initial size is significantly negative for a young firm and falls to zero with age.The hazard function conditional on size, other firm and industry-level characteristics, and macroeconomic conditions decreases with age only at higher ages, but shows the weaker property of Increasing Mean Residual Life over its entire life-duration. Instability in exchange rates affects survival of very young firms strongly, and the effect decreases to insignificant levels for older firms.

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Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 0502.

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Date of creation: Feb 2005
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Handle: RePEc:san:crieff:0502

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Related research
Keywords: Firm exit Learning Firm Dynamics Non-proportional hazards Hazard regression models

Other versions of this item:

Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models
C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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  8. Bhattacharjee, A., 2003. "Estimation in Hazard Regression Models under Ordered Departures from Proportionality," Cambridge Working Papers in Economics 0337, Faculty of Economics, University of Cambridge. [Downloadable!]
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  13. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May. [Downloadable!] (restricted)
  14. John Sutton, 1997. "Gibrat's Legacy," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 40-59, March. [Downloadable!] (restricted)
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