Profitability, Productivity and Growth

Marek Ignaszak and Petr Sedlacek
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Marek Ignaszak: Goethe University Frankfurt

No 2115, Discussion Papers from Centre for Macroeconomics (CFM)

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.

Pages: 61 pages
Date: 2021-05
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-eff and nep-gro
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Citations: View citations in EconPapers (1)

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Working Paper: Profitability, Productivity and Growth (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:2115

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