IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Firm Dynamics with Infrequent Adjustment and Learning

  • Eugenio Pinto
Registered author(s):

    Recent empirical findings have emphasized post entry growth of survivors, as opposed to exit of inefficient and small firms, as the main source of growth over time in the average size of a cohort of entering firms. One proposed explanation for the post entry growth of survivors is financing constraints. In this paper, we suggest an alternative explanation for the significant growth of survivors. At the core of our theory is the interaction of adjustment costs with learning by entering firms about their true efficiency. In our model, we consider the effect of linear and nonconvex adjustment costs, i.e., proportional and fixed costs, and conclude that for most configurations of adjustment costs firms will start small and grow rapidly after entry. Initial uncertainty about true profitability makes entering firms prudent since they want to avoid incurring superfluous costs on jobs that prove to be excessive ex post. Even though there is less pruning of inefficient firms, surviving firms will grow faster and therefore the survivors' contribution to growth in the cohort's average size will increase. With the purpose of measuring the effect of adjustment costs, we propose a decomposition of the change in a cohort’s average size into a survivor component and a selection component. Using data for the 1988 cohort of entrants in the Portuguese economy, we conclude that survivors have the highest contribution to changes in the cohort's average size. However, Manufacturing and Services are at opposite ends: initial selection is stronger and the survivor’s component is much smaller in Services than in Manufacturing. There is also evidence of inaction and lumpiness in labor adjustments, with significant differences across sectors. For a finite learning horizon version of the model, with positive dispersion in entry size, we conclude that adjustment costs can account for the high empirical survivors’ contribution. A calibration to the overall economy and the Manufacturing and Services cohorts suggests that proportional costs and the fixed entry cost are key parameters in matching the evidence on firm dynamics. Firms in Manufacturing learn relatively less initially about their efficiency, and are subject to much larger adjustment costs than firms in Services

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.wam.umd.edu/~eugenio/firm.pdf
    Our checks indicate that this address may not be valid because: 404 Not Found (http://www.wam.umd.edu/~eugenio/firm.pdf [302 Found]--> http://terpconnect.umd.edu/~eugenio/firm.pdf). If this is indeed the case, please notify (Christian Zimmermann)


    File Function: main text
    Download Restriction: no

    Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 704.

    as
    in new window

    Length:
    Date of creation: 03 Dec 2006
    Date of revision:
    Handle: RePEc:red:sed006:704
    Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
    Fax: 1-314-444-8731
    Web page: http://www.EconomicDynamics.org/society.htm
    Email:


    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:red:sed006:704. 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: (Christian Zimmermann)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.