Uncertainty, Misallocation and the Life-cycle Growth of Firms

Eero Mäkynen and Oskari Vähämaa
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Oskari Vähämaa: University of Helsinki, Finland.

No 146, Discussion Papers from Aboa Centre for Economics

Abstract: We propose a decomposition of static misallocation that distinguishes between idiosyncratic uncertainty and ex ante misallocation generated by tax-like distortions. Using profits-to-wage-bill ratios and value-addedto- wage-bill ratios, we can identify the two sources of misallocation. In the comprehensive Finnish firm-level data, uncertainty accounts for 41% of aggregate misallocation and has a strong decreasing age-dependent trend in it. We show that our results are quantitatively consistent with a life-cycle model of firm growth that incorporates learning. According to the dynamic model, uncertainty suppresses output by 8-12%, while ex ante misallocation has a 40% negative effect on output.

Keywords: firm dynamics; uncertainty; misallocation (search for similar items in EconPapers)
JEL-codes: D24 E23 L11 O47 (search for similar items in EconPapers)
Pages: 48
Date: 2021-05
New Economics Papers: this item is included in nep-bec, nep-dge, nep-eur, nep-mac and nep-tid
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