Firm Dynamics, Persistent Effects of Entry Conditions, and Business Cycles

89 Pages Posted: 15 Sep 2017

Date Written: October 1, 2016

Abstract

This paper examines how the state of the economy when businesses begin operations affects their size and performance over the lifecycle. Using micro-level data that covers the entire universe of businesses operating in the U.S. since the late 1970s, I provide new evidence that businesses born in downturns start on a smaller scale and remain smaller over their entire lifecycle. In fact, I find no evidence that these differences attenuate even long after entry. Using new data on the productivity and composition of startup businesses, I show that this persistence is related to selection at entry and demand-side channels. In order to evaluate the relative importance of these two mechanisms, I build a model of firm dynamics that includes aggregate shocks, idiosyncratic productivity, and a demand accumulation process. When I mute the effects of selection mechanisms, I find that the average initial size differences are more procyclical, but they are less persistent over time. Finally, I use the model to quantitatively evaluate the role of the persistent effects of entry conditions in the propagation of the Great Recession. My model simulations indicate that the impact of the crisis on the 2008-2009 cohorts reduces aggregate employment by at least one percentage point in the following ten years.

Suggested Citation

Moreira, Sara, Firm Dynamics, Persistent Effects of Entry Conditions, and Business Cycles (October 1, 2016). Available at SSRN: https://ssrn.com/abstract=3037178 or http://dx.doi.org/10.2139/ssrn.3037178

Sara Moreira (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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