Demand learning and firm dynamics:evidence from exporters

This paper provides evidence that learning about demand is an important driver of firms’ dynamics. We present a model of Bayesian learning in which firms are uncertain about their idiosyncratic demand in each of the markets they serve, and update their beliefs as noisy information arrives. Firms are predicted to update more their beliefs the younger they are. Guided by the model, we use exporter-level data to identify separately the idiosyncratic demand shocks and the firms’ beliefs about future demand. The learning process appears stronger for younger firms and weaker in more uncertain environments. Further, accumulated knowledge decays during exit periods. The updating process generates a decline in growth rate with age conditional on size. Firm exit behavior is also consistent with the theory: the exit probability decreases with the firms’ beliefs and the demand shocks the firm faces, and demand shocks trigger more exit in younger cohorts.