Firm Dynamics with Infrequent Adjustment and Learning
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. In this paper, as an explanation for the significant growth of survivors, we suggest the interaction of adjustment costs with learning by entering firms about their true efficiency. 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. We propose a decomposition of the change in a cohortâ€™s average size into a survivor component and a selection component. 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, initial selection is stronger and the survivorâ€™s component is much smaller in Services than in Manufacturing. A calibration of the model 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
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cooper, Russell & Haltiwanger, John & Willis, Jonathan L., 2015.
"Dynamics of labor demand: Evidence from plant-level observations and aggregate implications,"
Research in Economics,
Elsevier, vol. 69(1), pages 37-50.
- Russel W. Cooper & John C. Haltiwanger & Jonathan Willis, 2004. "Dynamics of Labor Demand: Evidence from Plant-level Observations and Aggregate Implications," NBER Working Papers 10297, National Bureau of Economic Research, Inc.
- Russell W. Cooper & John Haltiwanger & Jonathan L. Willis, 2003. "Dynamics of labor demand : evidence from plant-level observations and aggregate implications," Research Working Paper RWP 03-12, Federal Reserve Bank of Kansas City.
- Dunne, T. & Roberts, M.J. & Samuelson, L., 1988.
"The Growth And Failure Of U.S. Manufacturing Plants,"
1-87-5, Pennsylvania State - Department of Economics.
- Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1989. "The Growth and Failure of U. S. Manufacturing Plants," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 671-698.
- Dunne, Timothy & Roberts, Mark J & Samuelson, Larry, 1989.
"Plant Turnover and Gross Employment Flows in the U.S. Manufacturing Sector,"
Journal of Labor Economics,
University of Chicago Press, vol. 7(1), pages 48-71, January.
- Dunne, T. & Roberts, M.J. & Samuelson L., 1988. "Plant Turnover And Gross Employment Flows In The U.S. Manufacturing Sector," Papers 9-87-7, Pennsylvania State - Department of Economics.
- Guimaraes, Paulo & Mata, José & Portugal, Pedro, 1995.
"The Survival of New Plants: Start-up Conditions and Post-entry Evolution,"
CEPR Discussion Papers
1203, C.E.P.R. Discussion Papers.
- Mata, Jose & Portugal, Pedro & Guimaraes, Paulo, 1995. "The survival of new plants: Start-up conditions and post-entry evolution," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 459-481, December.
- Mata, Jose & Portugal, Pedro, 1994. "Life Duration of New Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 227-245, September.
- Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 285-315.
- Bee Yan Aw & Xiaomin Chen & Mark J. Roberts, 1997. "Firm-level Evidence on Productivity Differentials, Turnover, and Exports in Taiwanese Manufacturing," NBER Working Papers 6235, National Bureau of Economic Research, Inc.
- Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 53-82.
- Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
- Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-938, October.
- Thomas F. Cooley & Vincenzo Quadrini, 2001.
"Financial Markets and Firm Dynamics,"
American Economic Review,
American Economic Association, vol. 91(5), pages 1286-1310, December.
- Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
- Hamermesh, Daniel S. & Pfann, Gerard Antonie, 1996.
"Adjustment Costs in Factor Demand,"
CEPR Discussion Papers
1371, C.E.P.R. Discussion Papers.
- Steve J. Davis & John Haltiwanger, 1991.
"Gross job creation, gross job destruction and employment reallocation,"
Working Paper Series, Macroeconomic Issues
91-5, Federal Reserve Bank of Chicago.
- Steven J. Davis & John Haltiwanger, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 819-863.
- Steve J. Davis & John Haltiwanger, 1991. "Gross Job Creation, Gross Job Destruction and Employment Reallocation," NBER Working Papers 3728, National Bureau of Economic Research, Inc.
- Dmitriy Stolyarov & Boyan Jovanovic, 2000.
"Optimal Adoption of Complementary Technologies,"
American Economic Review,
American Economic Association, vol. 90(1), pages 15-29, March.
- Russell W. Cooper & John C. Haltiwanger, 2006.
"On the Nature of Capital Adjustment Costs,"
Review of Economic Studies,
Oxford University Press, vol. 73(3), pages 611-633.
- Cabral, Luis, 1995. "Sunk Costs, Firm Size and Firm Growth," Journal of Industrial Economics, Wiley Blackwell, vol. 43(2), pages 161-172, June.
- Eric Bartelsman & Stefano Scarpetta & Fabiano Schivardi, 2003. "Comparative Analysis of Firm Demographics and Survival: Micro-Level Evidence for the OECD Countries," OECD Economics Department Working Papers 348, OECD Publishing.
- Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
- Christopher L. Foote, 1998.
"Trend Employment Growth and the Bunching of Job Creation and Destruction,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 113(3), pages 809-834.
- Christopher L. Foote, 1998. "Trend Employment Growth and the Bunching of Job Creation and Destruction," Harvard Institute of Economic Research Working Papers 1818, Harvard - Institute of Economic Research.
When requesting a correction, please mention this item's handle: RePEc:sce:scecfa:467. 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: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.