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What drives firm growth? The role of demand and TFP shocks

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  • Fabiano Schivardi

    (University of Cagliari)

  • Andrea Pozzi

    (Einaudi Institute for Economics and Fina)

Abstract

We disentangle the contribution of unobserved heterogeneity in idiosyncratic demand and productivity to firm growth. We use a model of monopolistic competition with Cobb-Douglas production and a dataset of Italian manufacturing firms containing unique information on firm-level prices to reach three main results. First, demand is at least as important for firm growth as productivity. Second, firms' responses to shocks are lower than those predicted by our frictionless model, suggesting the existence of adjustment frictions. Finally, the deviation is more substantial for TFP shocks. We provide direct evidence that sluggish price adjustment influences responses to shocks, magnifying the effect of market appeal and dampening that of TFP. Moreover, organizational rigidity within the firm also contributes to reducing the response to TFP shocks, while it has no effects on that to demand shocks. These findings emphasize the importance of considering both dimensions of unobserved heterogeneity. They also imply that it is more difficult to fully adjust to TFP shocks.

Suggested Citation

  • Fabiano Schivardi & Andrea Pozzi, 2012. "What drives firm growth? The role of demand and TFP shocks," 2012 Meeting Papers 810, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:810
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    5. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
    6. Schivardi, Fabiano & Torrini, Roberto, 2008. "Identifying the effects of firing restrictions through size-contingent differences in regulation," Labour Economics, Elsevier, vol. 15(3), pages 482-511, June.
    7. Ackerberg, Daniel & Caves, Kevin & Frazer, Garth, 2006. "Structural identification of production functions," MPRA Paper 38349, University Library of Munich, Germany.
    8. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    9. Bruno, Michael, 1978. "Duality, Intermediate Inputs and Value-Added," Histoy of Economic Thought Chapters,in: Fuss, Melvyn & McFadden, Daniel (ed.), Production Economics: A Dual Approach to Theory and Applications, volume 2, chapter 1 McMaster University Archive for the History of Economic Thought.
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