Business dynamism – the process of firm entry, growth and exit – lies at the heart of modern endogenous growth models. While productivity differences have traditionally been seen as the main driving forces of business dynamism, a growing body of evidence suggests that customer acquisition frictions are at least as important. In light of this evidence, we propose a novel endogenous growth model in which innovating firms must first acquire customers to sell their products. Estimating our model with aggregate and firm-level data, we find that expansions of firms’ customer bases (market sizes) boost their incentives to innovate and shift resources towards high-growth businesses ("gazelles"). Combined, these effects explain over 1/3 of aggregate growth and substantially change predictions about the efficacy of growth policies. Finally, we document support for key model predictions using firm-level micro-data.
Consider a union of atomistic member states. Idiosyncratic business-cycle shocks cause persistent differences in unemployment. Private cross-border risk-sharing is limited. A federal unemployment-based reinsurance scheme can provide transfers to member states in recession, which helps stabilize local unemployment. Limits to federal generosity arise because member states control local labor-market policies. Calibrating the economy to a stylized European Monetary Union, we find that moral hazard puts notable constraints on the effectiveness of federal reinsurance. This is so even if payouts are indexed to member state's usual unemployment rate or if the federal level pays only in severe-enough recessions.
Firm-level research and development (R&D) incentives, such as subsidies and tax credits, are popular tools aimed at raising aggregate growth. We propose an empirical framework quantifying the aggregate impact of such firm-level R&D incentives. Our methodology -- grounded in modern endogenous growth theory -- can be applied with commonly available data and without solving a full structural model. Using firm-level data from the U.S., our estimates suggest that large firms are the strongest contributors to policy-induced increases in aggregate growth. However, subsidizing young, fast-growing firms (gazelles) can deliver the same bang for less than half the cost.
The increase in the relative supply of college-educated workers has transformed the labor force in every developed economy. How does this secular trend affect the characteristics of firms in the economy? To answer this question, I develop a general equilibrium model in which both workers and firms are heterogeneous. In the model, firms of different sizes rely on different types of workers due to capital-skill complementarity in production. I estimate the model using administrative linked employer-employee data from Germany. The model predicts that the changes in the labor force composition entail the reallocation of production towards firms with a larger capital stock, which tend to be older and less dynamic. The quantitative results indicate that the skill composition of the labor force can account for most of the recently documented shift in the size distribution of firms, the falling number of new firms, and the increasing market concentration. The patterns of business dynamism across German industries provide reduced-form empirical support for the model's predictions.