IDEAS home Printed from https://ideas.repec.org/p/red/sed006/704.html
   My bibliography  Save this paper

Firm Dynamics with Infrequent Adjustment and Learning

Author

Listed:
  • Eugenio Pinto

Abstract

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

Suggested Citation

  • Eugenio Pinto, 2006. "Firm Dynamics with Infrequent Adjustment and Learning," 2006 Meeting Papers 704, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:704
    as

    Download full text from publisher

    File URL: http://www.wam.umd.edu/~eugenio/firm.pdf
    File Function: main text
    Download Restriction: no

    More about this item

    Keywords

    Adjustment Costs; Learning; Young Firms;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.