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On the Turnover of Business Firms and Business Managers

  • Holmes, T.J.
  • Schmitz, J.A.

The success of a business depends in part on whether or not the manager and the business make a good "fit" or "match." Success also depends upon characteristics of the business that are distinct from the manager, for example, the convenience of the business location to customers. Variations across firms in "match quality" and in "business quality" account, in part, for why some businesses survive and others are discontinued. This paper is a first attempt at assessing the relative importance of variation in match quality and variation in business quality in accounting for the turnover dynamics of the U.S. small business sector. An evolutionary model is developed in which a selection process tends to eliminate both "unfit" business as well as "unfit" pairings between businesses and managers. We estimated this model with the Characteristics of Business Owners Survey. Our estimates suggest that variations in match quality play a more significant role than variations in business, or general, quality in accounting for turnover behavior of U.S. of small businesses. We discuss the implications of this finding and demonstrate its importance in the context of an experiment conducted in the estimated model economy.

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Paper provided by Wisconsin Madison - Social Systems in its series Working papers with number 9211.

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Length: 40 pages
Date of creation: 1992
Date of revision:
Handle: RePEc:att:wimass:9211
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UNIVERSITY OF WISCONSIN MADISON, SOCIAL SYSTEMS RESEARCH INSTITUTE(S.S.R.I.), MADISON WISCONSIN 53706 U.S.A.

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  1. Jovanovic, Boyan & Moffitt, Robert, 1988. "An Estimate Of A Sectoral Model Of Labor Mobility," Working Papers 88-32, C.V. Starr Center for Applied Economics, New York University.
  2. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1989. "The Growth and Failure of U. S. Manufacturing Plants," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 671-698.
  3. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  4. Evans, David S, 1987. "Tests of Alternative Theories of Firm Growth," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 657-74, August.
  5. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  6. Holmes, T.J. & Schmitz, J.A., 1988. "A Theory Of Enterpreneurship And Its Application To The Study Of Business Transfers," Working papers 8827, Wisconsin Madison - Social Systems.
  7. Pakes, Ariel & Ericson, Richard, 1998. "Empirical Implications of Alternative Models of Firm Dynamics," Journal of Economic Theory, Elsevier, vol. 79(1), pages 1-45, March.
  8. Zvi Eckstein & Kenneth I. Wolpin, 1989. "The Specification and Estimation of Dynamic Stochastic Discrete Choice Models: A Survey," Journal of Human Resources, University of Wisconsin Press, vol. 24(4), pages 562-598.
  9. Ariel Pakes, 1984. "Patents as Options: Some Estimates of the Value of Holding European Patent Stocks," NBER Working Papers 1340, National Bureau of Economic Research, Inc.
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