Productivity, Profitability and Growth

SedlÃ¡Ä ek, Petr and Marek Ignaszak
Authors registered in the RePEc Author Service: Petr Sedlacek

No 16205, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Demand; Firm heterogeneity; Growth; Innovation; R&d; Selection (search for similar items in EconPapers)
JEL-codes: D21 E24 L1 O31 O33 (search for similar items in EconPapers)
Date: 2021-05
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