English, Article, Journal or magazine article edition: Firm Dynamics with Infrequent Adjustment and Learning Eugenio Pinto

User activity

Share to:
 
Bookmark: http://trove.nla.gov.au/version/30081
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Firm dynamics with infrequent adjustment and learning
Author
  • Eugenio Pinto
Physical Description
  • preprint
Notes
  • Recent empirical findings have emphasized post entry growth of survivors, as opposed to exit of inefficient and small firms, as the main source of growth over time in the average size of a cohort of entering firms. In this paper, as an explanation for the significant growth of survivors, we suggest the interaction of adjustment costs with learning by entering firms about their true efficiency. Initial uncertainty about true profitability makes entering firms prudent since they want to avoid incurring superfluous costs on jobs that prove to be excessive ex post. We propose a decomposition of the change in a cohort’s average size into a survivor component and a selection component. For the 1988 cohort of entrants in the Portuguese economy, we conclude that survivors have the highest contribution to changes in the cohort's average size. However, initial selection is stronger and the survivor’s component is much smaller in Services than in Manufacturing. A calibration of the model suggests that proportional costs and the fixed entry cost are key parameters in matching the evidence on firm dynamics. Firms in Manufacturing learn relatively less initially about their efficiency, and are subject to much larger adjustment costs than firms in Services
  • RePEc:sce:scecfa:467
  • Recent empirical findings have emphasized post entry growth of survivors, as opposed to exit of inefficient and small firms, as the main source of growth over time in the average size of a cohort of entering firms. One proposed explanation for the post entry growth of survivors is financing constraints. In this paper, we suggest an alternative explanation for the significant growth of survivors. At the core of our theory is the interaction of adjustment costs with learning by entering firms about their true efficiency. In our model, we consider the effect of linear and nonconvex adjustment costs, i.e., proportional and fixed costs, and conclude that for most configurations of adjustment costs firms will start small and grow rapidly after entry. Initial uncertainty about true profitability makes entering firms prudent since they want to avoid incurring superfluous costs on jobs that prove to be excessive ex post. Even though there is less pruning of inefficient firms, surviving firms will grow faster and therefore the survivors' contribution to growth in the cohort's average size will increase. With the purpose of measuring the effect of adjustment costs, we propose a decomposition of the change in a cohort’s average size into a survivor component and a selection component. Using data for the 1988 cohort of entrants in the Portuguese economy, we conclude that survivors have the highest contribution to changes in the cohort's average size. However, Manufacturing and Services are at opposite ends: initial selection is stronger and the survivor’s component is much smaller in Services than in Manufacturing. There is also evidence of inaction and lumpiness in labor adjustments, with significant differences across sectors. For a finite learning horizon version of the model, with positive dispersion in entry size, we conclude that adjustment costs can account for the high empirical survivors’ contribution. A calibration to the overall economy and the Manufacturing and Services cohorts suggests that proportional costs and the fixed entry cost are key parameters in matching the evidence on firm dynamics. Firms in Manufacturing learn relatively less initially about their efficiency, and are subject to much larger adjustment costs than firms in Services
  • Adjustment Costs, Learning, Young Firms
  • RePEc:red:sed006:704
  • We propose an explanation for the rapid post-entry growth of surviving firms found in recent studies. At the core of our theory is the interaction between adjustment costs and learning by entering firms about their efficiency. We show that linear adjustment costs, i.e., proportional costs, create incentives for firms to enter smaller and for successful firms to grow faster after entry. Initial uncertainty about profitability makes entering firms prudent since they want to avoid incurring superfluous costs on jobs that prove to be excessive ex post. Because higher adjustment costs imply less pruning of inefficient firms and faster growth of surviving firms, the contribution of survivors to growth in a cohort's average size increases. For the cohort of 1988 entrants in the Portuguese economy, we conclude that survivors' growth is the main factor behind growth in the cohort's average size. However, initial selection is higher and the survivors' contribution to growth is smaller in services than in manufacturing. An estimation of the model shows that the proportional adjustment cost is the key parameter to account for the high empirical survivors' contribution. In addition, firms in manufacturing learn relatively less initially about their efficiency and are subject to larger adjustment costs than firms in services.
  • RePEc:fip:fedgfe:2008-14
Language
  • English
Contributed by
OAIster

Get this edition

  • Set up My libraries

    How do I set up "My libraries"?

    In order to set up a list of libraries that you have access to, you must first login or sign up. Then set up a personal list of libraries from your profile page by clicking on your user name at the top right of any screen.

  • All (1)
  • Unknown (1)
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.
None of your libraries hold this item.

User activity


e.g. test cricket, Perth (WA), "Parkes, Henry"

Separate different tags with a comma. To include a comma in your tag, surround the tag with double quotes.

Be the first to add a tag for this edition

Be the first to add this to a list

Comments and reviews

What are comments? Add a comment

No user comments or reviews for this version

Add a comment