A Missing Generation of Firms? Aggregate Effects of the Decline in New Business Formation

Todd Messer, Michael Siemer and Francois Gourio
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Todd Messer: UC Berkeley

No 752, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: Unlike most previous recessions, the 2007-2009 contraction was associated with a very large and persistent decline in new business formation. We study the aggregate implications of this phenomenon. While reduced entry rate plays only a minor role in accounting for the initial contraction, the effects are very persistent under plausible models of firm dynamics. This suggests that lower entry may account for part of the slow U.S. recovery. We start with a simple calculation that illustrates that lower en- try since 2006 “accounts†for a significant reduction of employment. We next present state-level and MSA-level evidence within the U.S. in order to evaluate this hypothesis. We consider several alternative factors that may affect the speed of the recovery such as the debt to GDP ratio, the decline in house prices, or the decline in small business lending. Among the considered hypothesis the decline in entry stands out as the dominant factor in predicting the speed of the recovery.

Date: 2016
New Economics Papers: this item is included in nep-sog
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:752

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