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Firm Exit, Vintage Effect and the Business Cycle in Norway

Kjell G Salvanes () and Ragnar Tveterås ()

Working Papers from Norwegian School of Economics and Business Administration-

Abstract: In spite of the large and growing literature on producer heterogeneity and firm exit behavior, little attention has been paid to the vintage capital theory of firm exits as an alternative hypothesis to learning/selection. Interpreted at the firm level the vintage capital theory predicts that exit rates increase in the age of capital. The present paper uses a panel of Norwegian manufacturing plants and constructs an index of capital age in addition to the age of the establishment in order to disentangle the effects of selection/learning and vintage capital on exit rates. The empirical results suggest a U-shaped exit function in the age of the plant implying both a learning effect and a vintage capital effect. The vintage capital effect is present under different assumption concerning reinvestments and controlling for unobserved heterogeneity. The exit rates are found to depend on the business cycle in that exits increase in a severe downturn. Our results also support the assertion that recessions are periods of cleansing where old capital equipment is scrapped via exiting plants.

Keywords: BUSINESS CYCLES; MANUFACTURES; MARKET STRUCTURE (search for similar items in EconPapers)
JEL-codes: D24 L11 O33 (search for similar items in EconPapers)
Pages: 28 pages
Date: 1999
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