Returns to Scale, Firm Entry, and the Business Cycle

85 Pages Posted: 31 Jan 2020 Last revised: 27 Jul 2022

Multiple version iconThere are 2 versions of this paper

Date Written: December 14, 2021

Abstract

I document that fewer firms with high returns to scale tend to get started in recessions, and that financial conditions at birth are critical for the formation of such businesses. A version of a firm dynamics model with financial frictions and the ability of potential entrepreneurs to choose their returns to scale can account for the data. In the estimated model, financial frictions slow the rate at which businesses with high returns to scale grow disproportionately; this discourages such firms from entering during recessions. The “missing generation” of firms with high returns to scale delays recoveries in the aftermath of economic crises.

Keywords: Business cycles, firm dynamics, financial frictions

JEL Classification: E22, E32

Suggested Citation

Smirnyagin, Vladimir, Returns to Scale, Firm Entry, and the Business Cycle (December 14, 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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