The Impact of Aggregate Fluctuations on Superstar Business Formation

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