Riskiness Choice and Endogenous Productivity Dispersion over the Business Cycle

Can Tian ()
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Can Tian: Department of Economics, University of Pennsylvania

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: Cross-sectional productivity dispersion is countercyclical, at the plant level and at the firm level. I incorporate a firm’s project choice decision into a firm dynamics model with business cycle features to explain this empirical .finding both qualitatively and quantitatively. In particular, all projects available have the same expected flow return and differ from one another only in the riskiness level. The endogenous option of exiting the market and limited funding for new investment jointly play an important role in motivating firms’ risk-taking behavior. The model predicts that relatively small firms are more likely to take risk and that the cross-sectional productivity dispersion, measured as the variance/standard deviation of firm-level profitability, is larger in recessions.

Keywords: Countercyclical Productivity Dispersion; Business Cycles; Firm Dynamics (search for similar items in EconPapers)
JEL-codes: E32 L11 L25 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2012-06-09
New Economics Papers: this item is included in nep-bec, nep-dge, nep-mac and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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