Demand or Productivity: What Determines Firms Growth?
58 Pages Posted: 11 Feb 2013
Date Written: October 25, 2012
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 data set of Italian manufacturing ﬁrms containing unique information on ﬁrm-level prices to reach three main conclusions. First, demand shocks are at least as important as productivity shocks for ﬁrm growth. Second, ﬁrms respond to shocks less than a frictionless model would predict, suggesting the existence of adjustment frictions. Finally, the degreeof under-responseis much larger for TFP shocks. This implies the existence of frictions with differential effects according to the nature of the shock, unlike the typical frictions studied by the literature on factor misallocation. We consider hurdles to ﬁrm reorganization as one such friction and show that they hamper ﬁrms’ responses to TFP shocks but not to demand shocks.
Keywords: TFP, demand heterogeneity, ﬁrm growth, misallocation
JEL Classification: D24, L11
Suggested Citation: Suggested Citation