Demand or Productivity: What Determines Firms Growth?

58 Pages Posted: 11 Feb 2013

See all articles by Andrea Pozzi

Andrea Pozzi

Einaudi Institute for Economics and Finance (EIEF)

Fabiano Schivardi

Luiss Guido Carli - Department of Economics and Finance; Einaudi Institute for Economics and Finance (EIEF); Centre for Economic Policy Research (CEPR)

Date Written: October 25, 2012

Abstract

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

Pozzi, Andrea and Schivardi, Fabiano, Demand or Productivity: What Determines Firms Growth? (October 25, 2012). Centro Studi Luca d'Agliano Development Studies Working Paper No. 344, Available at SSRN: https://ssrn.com/abstract=2215023 or http://dx.doi.org/10.2139/ssrn.2215023

Andrea Pozzi

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Fabiano Schivardi (Contact Author)

Luiss Guido Carli - Department of Economics and Finance ( email )

Viale Romania 32
Rome, Rome 00187
Italy

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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