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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

    (Department of Economics, University of St Andrews)

Abstract

This paper considers empirical work relating to models of firm dynamics. We show that a hazard regression model for firm exits, with a modification to accommodate age-varying covariate effects, provides an empirical framework accommodating many of the features of interest in studies on firm dynamics. Modelling implications of some of the popular theoretical models are considered and a set of empirical procedures for verifying testable implications of the theoretical models are proposed. The proposed hazard regression models can accommodate negative effects of initial size that go to zero with age (active learning model), negative initial size effects that fall 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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Bibliographic Info

Paper provided by EconWPA in its series Econometrics with number 0503021.

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Length: 29 pages
Date of creation: 29 Mar 2005
Date of revision:
Handle: RePEc:wpa:wuwpem:0503021

Note: Type of Document - pdf; pages: 29
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Web page: http://128.118.178.162

Related research

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

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References

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  1. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 53-82, January.
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  13. P. Hall & B. Presnell, 1999. "Intentionally biased bootstrap methods," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 61(1), pages 143-158.
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  16. repec:att:wimass:8904 is not listed on IDEAS
  17. Torben Martinussen, 2002. "Efficient Estimation of Fixed and Time-varying Covariate Effects in Multiplicative Intensity Models," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics & Finnish Statistical Society & Norwegian Statistical Association & Swedish Statistical Association, vol. 29(1), pages 57-74.
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Citations

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Cited by:
  1. Flora Bellone & Patrick Musso & Michel Quéré & Lionel Nesta, 2006. "Productivity and Market Selection of French Manufacturing Firms in the Nineties," Revue de l'OFCE, Presses de Sciences-Po, vol. 97(5), pages 319-349.
  2. Erol Taymaz & Şule Özler, 2007. "Foreign Ownership, Competition, and Survival Dynamics," Review of Industrial Organization, Springer, vol. 31(1), pages 23-42, August.
  3. Alcina Nunes & Elsa Sarmento, 2010. "Business Demography Dynamics In Portugal: A Non-Parametric Survival Analysis," GEE Papers 0022, Gabinete de Estratégia e Estudos, Ministério da Economia e da Inovação, revised Sep 2010.
  4. A. Bonaccorsi & S. Giannangeli, 2010. "One or more growth processes? Evidence from new Italian firms," Small Business Economics, Springer, vol. 35(2), pages 137-152, September.
  5. Elsa Morais Sarmento & Alcina Nunes, 2011. "Survival dynamics in Portugal, a regional perspective," ERSA conference papers ersa10p1313, European Regional Science Association.
  6. Alcina Nunes & Elsa de Morais Sarmento, 2010. "Business Survival in Portuguese Regions," GEMF Working Papers 2010-22, GEMF - Faculdade de Economia, Universidade de Coimbra.

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