The Impact of Aggregate Fluctuations on Superstar Business Formation

89 Pages Posted: 31 Jan 2020 Last revised: 20 Sep 2021

Multiple version iconThere are 2 versions of this paper

Date Written: September 19, 2021

Abstract

Using U.S. Census data, this paper documents that firms which eventually become large tend not to be started in recessions, and that financial conditions are critical for the formation of high-profile businesses. A standard firm dynamics model requires both the ability of potential entrepreneurs to choose their target size at birth and financial frictions in order to account for the data. In the estimated model, financial frictions slow the rate at which high-profile businesses grow disproportionately; this discourages such firms from entering during recessions. Government policy that stimulates the formation of high-profile businesses yields sizable welfare improvements; a more generous policy that targets entrants of any type leads to welfare losses.

Keywords: Business cycles, firm dynamics, financial frictions

JEL Classification: E22, E32, H25

Suggested Citation

Smirnyagin, Vladimir, The Impact of Aggregate Fluctuations on Superstar Business Formation (September 19, 2021). Available at SSRN: https://ssrn.com/abstract=3514855 or http://dx.doi.org/10.2139/ssrn.3514855

Vladimir Smirnyagin (Contact Author)

Yale University ( email )

New Haven, CT
United States

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