Were Small Businesses More Likely to Permanently Close in the Pandemic?

29 Pages Posted: 26 Jul 2022 Last revised: 30 Sep 2024

See all articles by Robert W. Fairlie

Robert W. Fairlie

University of California, Los Angeles (UCLA); National Bureau of Economic Research

Frank M. Fossen

University of Nevada, Reno; IZA Institute of Labor Economics

Reid Johnsen

CA Department of Tax and Fee Administration

Gentian Droboniku

CA Department of Tax and Fee Administration

Multiple version iconThere are 2 versions of this paper

Date Written: July 2022

Abstract

Previous estimates indicate that COVID-19 led to a large drop in the number of operating businesses operating early in the pandemic, but surprisingly little is known on whether these shutdowns turned into permanent closures and whether small businesses were disproportionately hit. This paper provides the first analysis of permanent business closures using confidential administrative firm-level panel data covering the universe of businesses filing sales taxes from the California Department of Tax and Fee Administration. We find large increases in closures rates in the first two quarters of 2020, but a strong reversal of this trend in the third quarter of 2020. The increase in closures rates in the first two quarters of the pandemic was substantially larger for small businesses than large businesses, but the rebound in the third quarter was also larger. The disproportionate closing of small businesses led to a sharp concentration of market share among larger businesses as indicated by the Herfindahl-Hirschman Index with only a partial reversal after the initial increase. The findings highlight the fragility of small businesses during a large adverse shock and the consequences for the competitiveness of markets.

Suggested Citation

Fairlie, Robert W. and Fossen, Frank M. and Johnsen, Reid and Droboniku, Gentian, Were Small Businesses More Likely to Permanently Close in the Pandemic? (July 2022). NBER Working Paper No. w30285, Available at SSRN: https://ssrn.com/abstract=4171462

Robert W. Fairlie (Contact Author)

University of California, Los Angeles (UCLA) ( email )

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Frank M. Fossen

University of Nevada, Reno ( email )

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HOME PAGE: http://business.unr.edu/faculty/ffossen/

IZA Institute of Labor Economics

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Reid Johnsen

CA Department of Tax and Fee Administration ( email )

Gentian Droboniku

CA Department of Tax and Fee Administration ( email )

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