Working Paper: NBER ID: w29705
Authors: Corina Boar; Denis Gorea; Virgiliu Midrigan
Abstract: We use firm-level data from Orbis to document that average returns to private business wealth are dispersed and persistent, and that firms experience large and fat-tailed changes in output that are not fully accompanied by changes in their capital stock and wage bill, and therefore generate large changes in firm profits. We interpret this evidence using a model of entrepreneurial dynamics in which return heterogeneity arises from both limited span of control, as well as from financial frictions which generate differences in marginal returns to wealth. The model matches the evidence on average returns and predicts that marginal returns are three fourths as dispersed as average returns, mostly reflecting risk as opposed to collateral constraints. Though financial frictions greatly depress individual firms' production choices and cash flows, they generate relatively modest productivity and output losses in the aggregate.
Keywords: Private Business Wealth; Returns; Financial Frictions; Wealth Inequality; Entrepreneurial Dynamics
JEL Codes: E2; E44; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial frictions (G19) | Average returns to private business wealth (D33) |
| Financial frictions (G19) | Marginal returns to private business wealth (P19) |
| Differences in marginal rates of return (D29) | Uninsurable business risk (G22) |
| Average returns (I26) | Dispersion in marginal returns (D39) |
| Financial frictions (G19) | Resource misallocation in the economy (D61) |
| Marginal returns (D29) | Fluctuations in firm profits (D21) |
| Expected marginal returns (C29) | Dispersion of marginal returns (D39) |
| Average returns (I26) | Marginal returns (D29) |