Heterogeneous Firms, Growth and the Long Shadows of Business Cycles

Cristiana Benedetti-Fasil, Giammario Impullitti, Omar Licandro, Petr Sedlacek and Adam Hal Spencer

No 13087, CESifo Working Paper Series from CESifo

Abstract: Do firms differ in their innovation response to business cycles? What economic forces shape this heterogeneity? And does it matter for aggregate propagation? We document substantial heterogeneity in firm-level R&D cyclicality, develop a theory to explain this fact, and validate its key mechanism in the data. In a tractable model of business cycles and innovation-driven growth, endogenous selection makes R&D particularly responsive to aggregate conditions for firms close to the exit margin. Consistent with this mechanism, firms closer to exit display more procyclical R&D in the data. Quantitatively, selection and endogenous growth interact powerfully: selection generates heterogeneous R&D cyclicality, while endogenous growth translates these heterogeneous responses into persistent aggregate effects. Ignoring heterogeneous R&D cyclicality misses roughly half of the long-run output cost of a severe recession.

Keywords: growth; business cycles; innovation; heterogeneous firms; selection (search for similar items in EconPapers)
JEL-codes: E32 L1 O31 O40 (search for similar items in EconPapers)
Date: 2026
New Economics Papers: this item is included in nep-ent, nep-inv and nep-sbm
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