Firm Dynamics with Infrequent Adjustment and Learning
AbstractRecent empirical findings have emphasized post entry growth of survivors, as opposed to exit of inefficient and small firms, as the main source of growth over time in the average size of a cohort of entering firms. In this paper, as an explanation for the significant growth of survivors, we suggest the interaction of adjustment costs with learning by entering firms about their true efficiency. Initial uncertainty about true profitability makes entering firms prudent since they want to avoid incurring superfluous costs on jobs that prove to be excessive ex post. We propose a decomposition of the change in a cohortâ€™s average size into a survivor component and a selection component. For the 1988 cohort of entrants in the Portuguese economy, we conclude that survivors have the highest contribution to changes in the cohort's average size. However, initial selection is stronger and the survivorâ€™s component is much smaller in Services than in Manufacturing. A calibration of the model suggests that proportional costs and the fixed entry cost are key parameters in matching the evidence on firm dynamics. Firms in Manufacturing learn relatively less initially about their efficiency, and are subject to much larger adjustment costs than firms in Services
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 467.
Date of creation: 04 Jul 2006
Date of revision:
Adjustment Costs; Learning; Young Firms;
Find related papers by JEL classification:
- E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-15 (All new papers)
- NEP-ENT-2006-07-15 (Entrepreneurship)
- NEP-MAC-2006-07-15 (Macroeconomics)
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