Productivity, Profitability and Growth

64 Pages Posted: 14 Jul 2021

See all articles by Petr Sedlacek

Petr Sedlacek

University of Oxford

Marek Ignaszak

Goethe University Frankfurt

Date Written: May 1, 2021


Recent empirical evidence suggests that firm selection and growth are largely demand-driven. We incorporate this feature into a model of endogenous growth in which heterogeneous firms innovate and survive based on profitability, rather than productivity alone. We show analytically that firm-level demand variation impacts aggregate growth by changing firms' incentives to innovate. Estimating our model on U.S. Census firm data, we quantify that 20% of aggregate growth is demand-driven and that the macroeconomic impact of growth policies is fundamentally different compared to a model driven by productivity variation alone. We find empirical support for our model mechanism in firm-level data.

JEL Classification: D21, E24, L1, O31, O33

Suggested Citation

Sedlacek, Petr and Ignaszak, Marek, Productivity, Profitability and Growth (May 1, 2021). CEPR Discussion Paper No. DP16205, Available at SSRN:

Petr Sedlacek (Contact Author)

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Marek Ignaszak

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics