Profitability, Productivity and Growth

Marek Ignaszak and Petr Sedlácek

No 937, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: 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.

Date: 2021-05-28
New Economics Papers: this item is included in nep-bec, nep-eff, nep-gro and nep-mac
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Working Paper: Profitability, Productivity and Growth (2021)
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