The Nature of Firm Growth

Abstract

About half of all startups fail within five years, and those that survive grow at vastly different speeds. Using Census microdata, we estimate that most of these differences are determined by ex-ante heterogeneity rather than persistent ex-post shocks. Embedding such heterogeneity in a firm dynamics model shows that the presence of ex-ante heterogeneity (i) is a key determinant of the firm size distribution and firm dynamics, (ii) can strongly affect the macroeconomic effects of firm-level frictions, and (iii) plays an important role in the recently documented decline in business dynamism and the apparent disappearance of high-growth startups (“gazelles”).

Keywords: Firm Dynamics; Startups; Entrepreneurship; Macroeconomics; Administrative Data

JEL Classification: D22; E23; E24