Periodic Reporting for period 4 - MacroEntrepreneurs (Entrepreneurs, Firms and the Macroeconomy)
Reporting period: 2023-06-01 to 2024-05-31
New detailed firm-level datasets reveal an enormous amount of heterogeneity across firms in terms of their growth and survival. While startups and young firms are, on average, the engines of aggregate job creation and productivity growth, only about half of all startups survive for more than five years and most of those that continue to operate are small and do not create jobs or innovate. Therefore, the documented growth prowess of young firms rests on the shoulders of a small fraction of high-growth firms, so called “gazelles”.
While the role of firm heterogeneity for macroeconomic dynamics has attracted academic interest in recent years, we still know relatively little about either the sources of differences between firm growth and survival patterns or about the implications this heterogeneity has for the macroeconomy. The MacroEntrepreneurs research agenda strives to make headway along both dimensions and expand our understanding of the origins of firm growth and its implications for macroeconomic dynamics.
The research program is divided into two parts with four distinct objectives.
Part A consists of two objectives providing empirical evidence on the origins of firm growth and survival. The first line of inquiry has been to estimate the extent to which firm growth and survival are predictable from the time of startup. The methodology of distinguishing deterministic growth profiles from transitory ex-post shocks is inspired by existing studies focusing on earnings. This methodology, however, has not yet been applied in the context of firm growth and survival.
The second line of inquiry in Part A is to investigate how the predictability of firms’ growth and survival is related to observable characteristics of their founders with a particular focus on their past employment history and whether or not they have owned a business before (so called “serial entrepreneurship”). While existing studies focus on how certain individual characteristics (such as personal wealth, age or education) impact the chances of becoming a business owner, little is known about how founders’ characteristics influence firm growth and survival.
Part B aims to understand theoretically and quantitatively how choices of heterogeneous entrepreneurs, firm dynamics and the macroeconomy are jointly interconnected. The focus on the interaction between firm and founder heterogeneity, and their role in shaping macroeconomic performance, is largely missing from current research. Existing models were either designed to study firm dynamics in detail, but they ignore the relation to household heterogeneity, or they were built for analyzing choices of financially constrained heterogeneous entrepreneurs, but with simplifying assumptions about firm dynamics and their relation to the macroeconomy. I go beyond the literature by building a state-of-the art macroeconomic model of firm dynamics in which business growth and survival profiles are shaped by heterogeneous characteristics of their founders. Importantly, the link between firm and founder heterogeneity will be disciplined by the empirical findings in Part A.
While the role of firm heterogeneity for macroeconomic dynamics has attracted academic interest in recent years, we still know relatively little about either the sources of differences between firm growth and survival patterns or about the implications this heterogeneity has for the macroeconomy. The MacroEntrepreneurs research agenda strives to make headway along both dimensions and expand our understanding of the origins of firm growth and its implications for macroeconomic dynamics.
The research program is divided into two parts with four distinct objectives.
Part A consists of two objectives providing empirical evidence on the origins of firm growth and survival. The first line of inquiry has been to estimate the extent to which firm growth and survival are predictable from the time of startup. The methodology of distinguishing deterministic growth profiles from transitory ex-post shocks is inspired by existing studies focusing on earnings. This methodology, however, has not yet been applied in the context of firm growth and survival.
The second line of inquiry in Part A is to investigate how the predictability of firms’ growth and survival is related to observable characteristics of their founders with a particular focus on their past employment history and whether or not they have owned a business before (so called “serial entrepreneurship”). While existing studies focus on how certain individual characteristics (such as personal wealth, age or education) impact the chances of becoming a business owner, little is known about how founders’ characteristics influence firm growth and survival.
Part B aims to understand theoretically and quantitatively how choices of heterogeneous entrepreneurs, firm dynamics and the macroeconomy are jointly interconnected. The focus on the interaction between firm and founder heterogeneity, and their role in shaping macroeconomic performance, is largely missing from current research. Existing models were either designed to study firm dynamics in detail, but they ignore the relation to household heterogeneity, or they were built for analyzing choices of financially constrained heterogeneous entrepreneurs, but with simplifying assumptions about firm dynamics and their relation to the macroeconomy. I go beyond the literature by building a state-of-the art macroeconomic model of firm dynamics in which business growth and survival profiles are shaped by heterogeneous characteristics of their founders. Importantly, the link between firm and founder heterogeneity will be disciplined by the empirical findings in Part A.
The project has produced eight scientific papers. While two are still in progress, six are finished. Out of these, three have been published in top general interest, field or policy journals. The other finished working papers are either submitted or in the revision phase at top general interest journals. The results from all finished papers have also been disseminated through various presentations at universities, policy institutions and major conferences.
The main results across all projects can be summarized as follows. First, a large share of heterogeneity across firms can be traced back to the time of startup. This suggests that firm performance is to some extent predictable. This finding in itself opens up a range of follow-up questions, most importantly which factors determine a firm’s performance?
Second, accounting for the presence of “ex-ante” differences across firms can fundamentally change the behavior of existing economic models. Therefore, the research shows that differences at the firm-level are crucial for the behavior of the macroeconomy.
Third, the results mentioned above also apply to the question of economic growth. A careful accounting of the differences across individual firms is important for our understanding of economic growth and the efficacy of pro-growth policies, such as R&D subsidies or tax credits. Our results suggest that subsidizing young and fast-growing firms is the most cost-effective way of boosting aggregate growth.
Fourth, serial entrepreneurship – the ownership of multiple businesses at the same time or consecutively – is a key source of variation in performance between firms. Businesses owned by serial entrepreneurs are more likely to survive and create jobs than those owned by “regular” businesses. Moreover, while being relatively rare, businesses of serial entrepreneurs are shown to be important for aggregate economic outcomes.
Fifth, the COVID pandemic has sparked an unprecedented adoption of remote work arrangements. We show that these come with two opposing macroeconomic effects. On the one hand, they increase profitability and increase firm entry. On the other hand, the shift the composition of firms towards small businesses which benefit relatively more from cost reductions associated with remote work. We show that firm entry needs to increase strongly and persistently in order for more prevalent remote work arrangements to increase welfare.
Sixth, building on the above and some existing research allowed us to develop a user-friendly online tool for forecasting the impact of the COVID pandemic on business dynamism. This tool is publicly available and offers an environment in which policy makers could gauge the impact of various pandemic scenarios.
The main results across all projects can be summarized as follows. First, a large share of heterogeneity across firms can be traced back to the time of startup. This suggests that firm performance is to some extent predictable. This finding in itself opens up a range of follow-up questions, most importantly which factors determine a firm’s performance?
Second, accounting for the presence of “ex-ante” differences across firms can fundamentally change the behavior of existing economic models. Therefore, the research shows that differences at the firm-level are crucial for the behavior of the macroeconomy.
Third, the results mentioned above also apply to the question of economic growth. A careful accounting of the differences across individual firms is important for our understanding of economic growth and the efficacy of pro-growth policies, such as R&D subsidies or tax credits. Our results suggest that subsidizing young and fast-growing firms is the most cost-effective way of boosting aggregate growth.
Fourth, serial entrepreneurship – the ownership of multiple businesses at the same time or consecutively – is a key source of variation in performance between firms. Businesses owned by serial entrepreneurs are more likely to survive and create jobs than those owned by “regular” businesses. Moreover, while being relatively rare, businesses of serial entrepreneurs are shown to be important for aggregate economic outcomes.
Fifth, the COVID pandemic has sparked an unprecedented adoption of remote work arrangements. We show that these come with two opposing macroeconomic effects. On the one hand, they increase profitability and increase firm entry. On the other hand, the shift the composition of firms towards small businesses which benefit relatively more from cost reductions associated with remote work. We show that firm entry needs to increase strongly and persistently in order for more prevalent remote work arrangements to increase welfare.
Sixth, building on the above and some existing research allowed us to develop a user-friendly online tool for forecasting the impact of the COVID pandemic on business dynamism. This tool is publicly available and offers an environment in which policy makers could gauge the impact of various pandemic scenarios.
The project has extended the state of the art beyond the proposed topics along three dimensions. In particular, it has delved into the area of economic growth, the macroeconomic impact of remote work, made explicit links to unemployment and general labor market patterns and lead to the development of a policy tool useful during and in the aftermath of the COVID pandemic.