Entrepreneurial tail risk: implications for employment dynamics
New businesses are important for job creation and have contributed more than proportionally to the expansion in the 1990s and the decline of employment after the 2007 recession. This paper provides a framework for analyzing determinants of business creation in a world where new business owners are exposed to idiosyncratic risk due to initial imperfect diversification. This paper uses this framework to analyze how entrepreneurial risk has changed over time and how this has affected employment in the US. Conditions are provided under which entrepreneurial risk can be identified using micro data on the size distribution of new businesses and their exit rates. The baseline model considers both upside and downside risk. Applied to US time series data, structural estimates suggest that higher upside risk explains much of the high job creation in the late 1990s. Time variation in risk explains around 40% of the variation in employment of new businesses. Reduced form results show that this relationship is strongest in IT-related industries. When restricting the model to a single risk factor, the explanatory power for employment drops by 25% to 50% compared to the baseline estimates.
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Postal: 10 Independence Mall, Philadelphia, PA 19106-1574|
Web page: http://www.philadelphiafed.org/
More information through EDIRC
|Order Information:|| Web: http://www.phil.frb.org/econ/wps/index.html Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Yoonsoo Lee & Toshihiko Mukoyama, 2008.
"Entry, exit and plant-level dynamics over the business cycle,"
0718, Federal Reserve Bank of Cleveland.
- Toshihiko Mukoyama & Yoonsoo Lee, 2008. "Entry, Exit, and Plant-level Dynamics over the Business Cycle," 2008 Meeting Papers 454, Society for Economic Dynamics.
- Yoonsoo Lee & Toshihiko Mukoyama, 2008. "Entry, Exit, and Plant-Level Dynamics over the Business Cycle," Working Papers 08-17, Center for Economic Studies, U.S. Census Bureau.
- Erik Hurst & Benjamin Wild Pugsley, 2011.
"What Do Small Businesses Do?,"
NBER Working Papers
17041, National Bureau of Economic Research, Inc.
- Hansen, Lars Peter & Sargent, Thomas J., 2007.
"Recursive robust estimation and control without commitment,"
Journal of Economic Theory,
Elsevier, vol. 136(1), pages 1-27, September.
- Hansen, Lars Peter & Sargent, Thomas J., 2005. "Recursive robust estimation and control without commitment," Discussion Paper Series 1: Economic Studies 2005,28, Deutsche Bundesbank, Research Centre.
- Ezra Oberfield, 2013.
"Business Networks, Production Chains, and Productivity: A Theory of Input-Output Architecture,"
2013 Meeting Papers
120, Society for Economic Dynamics.
- Ezra Oberfield, 2011. "Business networks, production chains and productivity: A theory of input-output architecture," Working Paper Series WP-2011-12, Federal Reserve Bank of Chicago.
- Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001.
"Nominal rigidities and the dynamic effects of a shock to monetary policy,"
0107, Federal Reserve Bank of Cleveland.
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
- Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
- Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-38, October.
- Judd, Kenneth L., 1985. "The law of large numbers with a continuum of IID random variables," Journal of Economic Theory, Elsevier, vol. 35(1), pages 19-25, February.
- John C. Haltiwanger & Ron S. Jarmin & Javier Miranda, 2010.
"Who Creates Jobs? Small vs. Large vs. Young,"
NBER Working Papers
16300, National Bureau of Economic Research, Inc.
- Marcelo Veracierto, 2004.
"Firing Costs and Business Cycle Fluctuations,"
2004 Meeting Papers
590, Society for Economic Dynamics.
- Costas Arkolakis, 2009.
"A Unified Theory of Firm Selection and Growth,"
CESifo Working Paper Series
2679, CESifo Group Munich.
- Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
- Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
- Gian Luca Clementi & Dino Palazzo, 2010. "Entry, Exit, Firm Dynamics, and Aggregate Fluctuations," Working Paper Series 27_10, The Rimini Centre for Economic Analysis.
- Jason DeBacker & Bradley Heim & Vasia Panousi & Shanthi Ramnath & Ivan Vidangos, 2012. "The properties of income risk in privately held businesses," Finance and Economics Discussion Series 2012-69, Board of Governors of the Federal Reserve System (U.S.).
- Philippe Weil, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 29-42.
When requesting a correction, please mention this item's handle: RePEc:fip:fedpwp:13-45. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Beth Paul)
If references are entirely missing, you can add them using this form.