Working Paper: CEPR ID: DP9184
Authors: Andrea Pozzi; Fabiano Schivardi
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
JEL Codes: D24; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Demand shocks (E39) | Firm growth (L25) |
| TFP shocks (F16) | Firm growth (L25) |
| Firm growth (L25) | Less responsiveness to shocks (E39) |
| Lower managerial quality (L15) | Underresponse to TFP shocks (F16) |
| Demand shocks (E39) | Adjustment frictions (J69) |
| TFP shocks (F16) | Adjustment frictions (J69) |