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The Growth Potential of Startups over the Business Cycle

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  • Petr Sedlacek

    () (Rheinische Friedrich-Wilhelms-Universität Bonn (University of Bonn), Wirtschaftswissenschaftlicher Fachbereich (Economics Department), Bonn Graduate School of Economics)

  • Vincent Sterk

    () (Centre for Macroeconomics (CFM))

Abstract

This paper shows that job creation of cohorts of U.S. firms is strongly infl uenced by aggregate conditions at the time of their entry. Using data from the Business Dynamics Statistics (BDS) we follow cohorts of young firms and document that their employment levels are very persistent and largely driven by the intensive margin (average firm size) rather than the extensive margin (number of firms). To differentiate changes in the composition of startup cohorts from post-entry choices and to evaluate aggregate effects, we estimate a general equilibrium firm dynamics model using BDS data. We find that even for older firms, the aggregate state at birth drives the vast majority of variations in employment across cohorts of the same age. The key force behind this result are fl uctuations in the composition of startup cohorts with respect to firms' potential to grow large. At the aggregate level, factors determined at the startup phase account for the large low-frequency fluctuations observed in the employment rate.

Suggested Citation

  • Petr Sedlacek & Vincent Sterk, 2014. "The Growth Potential of Startups over the Business Cycle," Discussion Papers 1403, Centre for Macroeconomics (CFM).
  • Handle: RePEc:cfm:wpaper:1403
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    References listed on IDEAS

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    1. Marco Bassetto & Marco Cagetti & Mariacristina De Nardi, 2015. "Credit Crunches and Credit Allocation in a Model of Entrepreneurship," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 53-76, January.
    2. John Haltiwanger & Ron S. Jarmin & Javier Miranda, 2010. "Who Creates Jobs? Small vs. Large vs. Young," Working Papers 10-17, Center for Economic Studies, U.S. Census Bureau.
    3. Leo Kaas & Philipp Kircher, 2015. "Efficient Firm Dynamics in a Frictional Labor Market," American Economic Review, American Economic Association, pages 3030-3060.
    4. Erik Hurst & Benjamin Wild Pugsley, 2011. "What Do Small Businesses Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 73-142.
    5. Teresa C Fort & John Haltiwanger & Ron S Jarmin & Javier Miranda, 2013. "How Firms Respond to Business Cycles: The Role of Firm Age and Firm Size," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(3), pages 520-559, August.
    6. Gian Luca Clementi & Dino Palazzo, 2010. "Entry, Exit, Firm Dynamics, and Aggregate Fluctuations," Working Paper series 27_10, Rimini Centre for Economic Analysis.
    7. Hawkins, William B. & Acemoglu, Daron, 2014. "Search with multi-worker firms," Theoretical Economics, Econometric Society, vol. 9(3), September.
    8. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
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    Citations

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    Cited by:

    1. Hubert Janicki & Henry Hyatt & Emin Dinlersoz, 2015. "Who Works for Whom? Worker Sorting in a Model of Entrepreneurship with Heterogeneous Labor Markets," 2015 Meeting Papers 104, Society for Economic Dynamics.
    2. repec:cen:wpaper:15-08 is not listed on IDEAS
    3. Gavazza, Alessandro & Mongey, Simon & Violante, Giovanni L., 2017. "Aggregate Recruiting Intensity," Staff Report 553, Federal Reserve Bank of Minneapolis.
    4. Roger M. Gomis & Sameer Khatiwada, 2017. "Firm dynamics and business cycle: What doesn't kill you makes you stronger?," IHEID Working Papers 03-2017, Economics Section, The Graduate Institute of International Studies.
    5. Julia Thomas & Berardino Palazzo & Aubhik Khan & Gian Luca Clementi, 2014. "Entry, Exit and the Shape of Aggregate Fluctuations in a General Equilibrium Model with Capital Heterogeneity," 2014 Meeting Papers 1344, Society for Economic Dynamics.
    6. DiSalvo, James & Johnston, Ryan, 2016. "Banking Trends: The Growing Role of CRE Lending," Banking Trends, Federal Reserve Bank of Philadelphia, pages 15-21.
    7. Fischer, Sven & Guth, Werner & Kaplan, Todd & Zultan, Roi, 2014. "Auctions and Leaks: A Theoretical and Experimental Investigation," MPRA Paper 58940, University Library of Munich, Germany.
    8. Carlino, Gerald A. & Drautzburg, Thorsten, 2017. "The Role of Startups for Local Labor Markets," Working Papers 17-31, Federal Reserve Bank of Philadelphia.
    9. Sara Moreira, 2017. "Firm Dynamics, Persistent Effects of Entry Conditions, and Business Cycles," Working Papers 17-29, Center for Economic Studies, U.S. Census Bureau.
    10. Brixy, Udo & Murmann, Martin, 2016. "The growth and human capital structure of new firms over the business cycle," IAB Discussion Paper 201642, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    11. Aysegul Sahin & Benjamin Pugsley, 2015. "Grown-up Business Cycles," 2015 Meeting Papers 655, Society for Economic Dynamics.
    12. Gavazza, Alessandro & Mongey, Simon & Violante, Giovanni L, 2016. "Aggregate recruiting intensity," LSE Research Online Documents on Economics 69017, London School of Economics and Political Science, LSE Library.
    13. Pugsley, Benjamin & Sahin, Aysegul, 2014. "Grown-up business cycles," Staff Reports 707, Federal Reserve Bank of New York, revised 01 Sep 2015.
    14. Robert G. Valletta, 2018. "Recent Flattening in the Higher Education Wage Premium: Polarization, Skill Downgrading, or Both?," NBER Chapters,in: Education, Skills, and Technical Change, and Future U.S. GDP Growth National Bureau of Economic Research, Inc.
    15. repec:aea:aecrev:v:107:y:2017:i:10:p:3182-3210 is not listed on IDEAS
    16. In Hwan Jo & Tatsuro Senga, 2016. "Firm Dynamics, Misallocation and Targeted Policies," Working Papers 809, Queen Mary University of London, School of Economics and Finance.
    17. Pavol Majher, 2015. "Firm entry and exit, investment irreversibility, and business cycle dynamics," Vienna Economics Papers 1513, University of Vienna, Department of Economics.
    18. repec:eee:labeco:v:47:y:2017:i:c:p:64-74 is not listed on IDEAS
    19. Murmann, Martin, 2017. "The Growth and Human Capital Structure of New Firms over the Business Cycle," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168290, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Firm Dynamics; Heterogeneous Agents; Maximum Likelihood; DSGE;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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