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Who Quits Next? Firm Growth in Growing Economies

Author

Listed:
  • Emircan Yurdagul

    (Washington University in Saint Louis)

  • Julieta Caunedo

    (Cornell University)

Abstract

This paper provides a theory linking characteristics of the industry dynamics to aggregate growth. We analyze firms' life cycle productivity, employment-age profiles, and firm selection across countries. Using a large cross-country dataset we document (i) more frequent labor productivity growth for firms operating in fast growing economies, (ii) lack of systematic relationship between the tail of the employment size distribution and growth and (iii) steeper employment-age profiles in slow growing economies. Our working thesis is that firms' likelihood of turning their investments into actual productivity growth, and uncertainty on their returns if successful, impacts firms investment in productivity, selection and aggregate growth. We think of firm uncertainty broadly, to include for example political instability, changes in tax regimes, lack of social capital or firm demand fluctuations. We argue that in slow growing rich productive economies, steep-employment age profiles are related to high return uncertainty and strong firm selection. We are able to accommodate poor and rich slow growing economies by decoupling firm's probability of success from return uncertainty. We build a tractable general equilibrium model that displays endogenous long run growth compatible with a stationary size distribution and the documented empirical facts. We contribute to the literature by analyzing how variations in the probability of firm success and return uncertainty account for differences in observed industry structure and its relationship with aggregate growth.

Suggested Citation

  • Emircan Yurdagul & Julieta Caunedo, 2015. "Who Quits Next? Firm Growth in Growing Economies," 2015 Meeting Papers 1240, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:1240
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    File URL: https://economicdynamics.org/meetpapers/2015/paper_1240.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Amaia Iza, 2016. "Entrepreneurial skills, technological progress and firm growth," EcoMod2016 9469, EcoMod.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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