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Sunk Costs and the Growth and Failure of Small Business

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  • Patrick Paul Walsh

Abstract

We model the growth and failure of small business in Irish Manufacturing during the period 1973-1994. We estimate the effect of start-up size on the employment growth while controlling for the business cycle, the life cycle and the probability of business survival, amongst other factors. Learning models of firm selection and evolution are accepted in Homogenous Goods but rejected in R&D sectors. Due to high (low) entry and failure costs in R&D (Homogenous Goods) sectors, learning is undertaken ex-ante (ex-post), inducing entry with certainty (uncertainty) concerning ex-post performance, causing Gibrat's law to hold (fail).

Suggested Citation

  • Patrick Paul Walsh, 2000. "Sunk Costs and the Growth and Failure of Small Business," Trinity Economics Papers 20002, Trinity College Dublin, Department of Economics.
  • Handle: RePEc:tcd:tcduee:20002
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    File URL: http://www.tcd.ie/Economics/TEP/2000_papers/TEPNo2PW20.pdf
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    References listed on IDEAS

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    1. 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.
    2. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, January.
    3. Baldwin, John R. & Rafiquzzaman, Mohammed, 1995. "Selection versus evolutionary adaptation: Learning and post-entry performance," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 501-522, December.
    4. 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.
    5. Baldwin,John R. & Gorecki,Paul, 1998. "The Dynamics of Industrial Competition," Cambridge Books, Cambridge University Press, number 9780521633574.
    6. Hall, Bronwyn H, 1987. "The Relationship between Firm Size and Firm Growth in the U.S. Manufacturing Sector," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 583-606, June.
    7. 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.
    8. 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.
    9. McAleese, D., 1971. "Effective Tariffs and the Structure of Industrial Protection in Ireland," Research Series, Economic and Social Research Institute (ESRI), number GRS62.
    10. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December.
    11. Davies, Stephen & Lyons, Bruce, 1996. "Industrial Organization in the European Union: Structure, Strategy, and the Competitive Mechanism," OUP Catalogue, Oxford University Press, number 9780198289739.
    12. Audretsch, David B & Klomp, Luuk & Thurik, A R Roy, 1997. "Do Services Differ From Manufacturing? The Post-Entry Performance of Firms in Dutch Services," CEPR Discussion Papers 1718, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Ciara Whelan & Patrick P. Walsh, 2000. "The importance of structural change in industry for growth," Open Access publications 10197/134, School of Economics, University College Dublin.

    More about this item

    JEL classification:

    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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