Working Paper: CEPR ID: DP16205
Authors: Petr Sedlacek; Marek Ignaszak
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
JEL Codes: D21; E24; L1; O31; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm-level demand variation (J23) | aggregate economic growth (O40) |
| higher demand growth at the firm level (J23) | incentives for research and development (R&D) (O32) |
| demand variation (C69) | firm-level innovation rates (O31) |
| demand variation (C69) | aggregate growth (E10) |
| policies aimed at subsidizing operational costs (R38) | growth outcomes (depending on demand-side factors) (O49) |