Demand or productivity: What determines firm growth?

Fabiano Schivardi and Andrea Pozzi

No 9184, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We disentangle the contribution of unobserved heterogeneity in idiosyncratic demand and productivity to firm growth. We use a model of monopolistic competition with Cobb-Douglas production and a dataset of Italian manufacturing firms containing unique information on firm-level prices to reach three main conclusions. First, demand shocks are at least as important as productivity shocks for firm growth. Second, firms respond to shocks less than a frictionless model would predict, suggesting the existence of adjustment frictions. Finally, the degree of under-response is much larger for TFP shocks. This implies the existence of frictions with differential effects according to the nature of the shock, unlike the typical frictions studied by the literature on factor misallocation. We consider hurdles to firm reorganization as one such friction and show that they hamper firms' responses to TFP shocks but not to demand shocks.

Keywords: Demand heterogeneity; Firm growth; Misallocation; TFP (search for similar items in EconPapers)
JEL-codes: D24 L11 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-bec
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Demand or productivity: what determines firm growth? (2016)
Working Paper: Demand or productivity: What determines firm growth? (2012)
Working Paper: Demand or Productivity: What Determines Firm Growth? (2012)
Working Paper: Demand or productivity: What determines firm growth? (2012)
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