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A Firm's First Year

Author

Listed:
  • 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.

Suggested Citation

  • Jaap H. Abbring & Jeffrey R. Campbell, 2005. "A Firm's First Year," Tinbergen Institute Discussion Papers 05-046/3, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20050046
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    References listed on IDEAS

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    3. Marinescu, Ioana, 2016. "Divorce: What does learning have to do with it?," Labour Economics, Elsevier, vol. 38(C), pages 90-105.
    4. Jaap Abbring & James Heckman, 2008. "Dynamic policy analysis," CeMMAP working papers CWP05/08, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    5. Brave, Scott A. & Butters, R. Andrew & Fogarty, Michael, 2022. "The perils of working with big data, and a SMALL checklist you can use to recognize them," Business Horizons, Elsevier, vol. 65(4), pages 481-492.
    6. Jaap H. Abbring, 2010. "Identification of Dynamic Discrete Choice Models," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 367-394, September.

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    More about this item

    Keywords

    firm exit; option value; fixed costs; Bayesian learning;
    All these keywords.

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • 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; Restaurants; Recreation; Tourism

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