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Firm-specific learning and the investment behavior of large and small firms

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  • Wenli Li
  • John A. Weinberg

Abstract

We examine a model of the size distribution and growth of firms whereby firms learn about idiosyncratic productivity parameters. Aggregate shocks, by adding noise to learning at the firm level, can produce differentiated response across firms with their reactions depending on the position of the firms in their individual life cycle. In particular, young firms, which are smaller on average than older firms, can 'overreact' to aggregate shocks. Such differences across firm sizes and ages, which arise here in a model with perfect financial markets, are often attributed to financial frictions that to financial frictions that hit small and large firms differently.

Suggested Citation

  • Wenli Li & John A. Weinberg, 1999. "Firm-specific learning and the investment behavior of large and small firms," Working Paper 99-03, Federal Reserve Bank of Richmond.
  • Handle: RePEc:fip:fedrwp:99-03
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    References listed on IDEAS

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    Cited by:

    1. Tatsuro Senga, 2014. "A New Look at Uncertainty Shocks: Imperfect Information and Misallocation," UTokyo Price Project Working Paper Series 042, University of Tokyo, Graduate School of Economics.
    2. Eugenio P. Pinto, 2009. "Firms' relative sensitivity to aggregate shocks and the dynamics of gross job flows," Finance and Economics Discussion Series 2009-02, Board of Governors of the Federal Reserve System (U.S.).
    3. repec:kap:mktlet:v:28:y:2017:i:4:d:10.1007_s11002-017-9429-2 is not listed on IDEAS
    4. Pinto, Eugénio, 2011. "Firms' relative sensitivity to aggregate shocks and the dynamics of gross job flows," Labour Economics, Elsevier, vol. 18(1), pages 111-119, January.

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    Keywords

    Corporations ; Econometric models ; Investments;

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