Working Paper: NBER ID: w17853
Authors: Lucia Foster; John C. Haltiwanger; Chad Syverson
Abstract: It is well known that new businesses are typically much smaller than their established industry competitors, and that this size gap closes slowly. We show that even in commodity-like product markets, these patterns do not reflect productivity gaps, but rather differences in demand-side fundamentals. We document and explore patterns in plants' idiosyncratic demand levels by estimating a dynamic model of plant expansion in the presence of a demand accumulation process (e.g., building a customer base). We find active accumulation driven by plants' past production decisions quantitatively dominates passive demand accumulation, and that within-firm spillovers affect demand levels but not growth.
Keywords: demand accumulation; new plants growth; idiosyncratic demand; business dynamics
JEL Codes: D2; E23; L1; L6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| within-firm spillovers (F12) | demand levels (R22) |
| plant age (Q16) | demand levels (R22) |
| past sales (D44) | future demand levels (J23) |
| new plants (Q29) | demand levels (R22) |
| age of plant (Q23) | demand levels (R22) |
| firm size (L25) | initial demand levels (J23) |
| active demand accumulation (J23) | passive accumulation (H23) |