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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, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp15445
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    References listed on IDEAS

    as
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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. Brunetti, Marianna & Zaiceva, Anzelika, 2023. "Is Self-Employment for Migrants? Evidence from Italy," GLO Discussion Paper Series 1313, Global Labor Organization (GLO).
    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. Karolis Matikonis & Matthew Gobey, 2024. "Small Business Property Tax Reductions and Firm Productivity," Small Business Economics, Springer, vol. 62(1), pages 307-324, January.
    6. 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.
    7. 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).
    8. Brunetti, Marianna & Zaiceva, Anzelika, 2023. "Is Self-Employment for Migrants? Evidence from Italy," IZA Discussion Papers 16314, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    pandemic; coronavirus; COVID-19; self-employment; closures; survival; entrepreneurship; small business; shelter-in-place restrictions; social distancing restrictions;
    All these keywords.

    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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