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Were Small Businesses More Likely to Permanently Close in the Pandemic?

Author

Listed:
  • Fairlie, Robert W.

    (University of California, Los Angeles)

  • Fossen, Frank M.

    (University of Nevada, Reno)

  • Johnsen, Reid

    (California Department of Tax and Finance Administration)

  • Droboniku, Gentian

    (California Department of Tax and Finance Administration)

Abstract

Previous estimates indicate that COVID-19 led to a large drop in the number of operating businesses operating early in the pandemic, but surprisingly little is known on whether these shutdowns turned into permanent closures and whether small businesses were disproportionately hit. This paper provides the first analysis of permanent business closures using confidential administrative firm-level panel data covering the universe of businesses filing sales taxes from the California Department of Tax and Fee Administration. We find large increases in closures rates in the first two quarters of 2020, but a strong reversal of this trend in the third quarter of 2020. The increase in closures rates in the first two quarters of the pandemic was substantially larger for small businesses than large businesses, but the rebound in the third quarter was also larger. The disproportionate closing of small businesses led to a sharp concentration of market share among larger businesses as indicated by the Herfindahl-Hirschman Index with only a partial reversal after the initial increase. The findings highlight the fragility of small businesses during a large adverse shock and the consequences for the competitiveness of markets.

Suggested Citation

  • Fairlie, Robert W. & Fossen, Frank M. & Johnsen, Reid & Droboniku, Gentian, 2022. "Were Small Businesses More Likely to Permanently Close in the Pandemic?," IZA Discussion Papers 15445, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp15445
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    Cited by:

    1. Marianna Brunetti & Anzelika Zaiceva, 2023. "Is Self-Employment for Migrants? Evidence from Italy," CEIS Research Paper 563, Tor Vergata University, CEIS, revised 31 Jul 2023.
    2. Teng Ye & Jingnan Zheng & Junhui Jin & Jingyi Qiu & Wei Ai & Qiaozhu Mei, 2024. "Using Artificial Intelligence to Unlock Crowdfunding Success for Small Businesses," Papers 2407.09480, arXiv.org.
    3. Michele Battisti & Filippo Belloc & Massimo Del Gatto, 2023. "COVID-19, Innovative Firms and Resilience," WIPO Economic Research Working Papers 73, World Intellectual Property Organization - Economics and Statistics Division.
    4. Karen Chapple & Laura Schmahmann, 2023. "Can we “Claim†the Workforce? A Labor-Focused Agenda for Economic Development in the Face of an Uncertain Future," Economic Development Quarterly, , vol. 37(1), pages 14-19, February.
    5. Martins, Ana & Pereira dos Santos, João & Pozzobon, Fernando, 2025. "Sailing Through Troubled Waters: Evidence from Support Discontinuities to Firms in Times of Crisis," IZA Discussion Papers 18136, IZA Network @ LISER.
    6. Karolis Matikonis & Matthew Gobey, 2024. "Small Business Property Tax Reductions and Firm Productivity," Small Business Economics, Springer, vol. 62(1), pages 307-324, January.
    7. Ana Martins & João Pereira dos Santos & Fernando Pozzobon, 2025. "Sailing through Troubled Waters: Evidence from the APOIAR Program," GEE Papers 190, Gabinete de Estratégia e Estudos, Ministério da Economia, revised May 2025.
    8. Francesco Martielli & Antonio Salvi & Emanuele Doronzo, 2024. "Corporate social responsibility practices and value creation through open innovation approach: Evidence from the STOXX Europe 600 Index," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(5), pages 4732-4745, September.
    9. Grijalva, Diego, 2023. "Women-led firms’ performance during the Covid-19 pandemic. Evidence from an emerging economy," MPRA Paper 117225, University Library of Munich, Germany.
    10. Miller, Jason W. & Phares, Jonathan & Burks, Stephen V., 2025. "Bring Out the Bulls: Employment Dynamics of Trucking Firms During Highly Expansive Market Conditions," IZA Discussion Papers 17627, IZA Network @ LISER.
    11. Zhou, Nan & Sun, Ruohan, 2024. "Coping with the storm: The role of fintech in SME survival," International Review of Financial Analysis, Elsevier, vol. 93(C).
    12. Gao, Haoyu & Li, Jinxuan & Wen, Huiyu, 2023. "Bank funding costs during the COVID-19 pandemic: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    13. Rebecca Alguera Kleine & Bingbing Ge & Alfredo Massis, 2024. "Look in to look out: strategy and family business identity during COVID-19," Small Business Economics, Springer, vol. 63(3), pages 993-1018, October.
    14. Ekin Ayse Özsuca, 2024. "Agribusiness resilience during the COVID-19 pandemic: The role of credit constraints," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 70(12), pages 591-605.

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    JEL classification:

    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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