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Entrepreneurs, Firms and the Macroeconomy

Periodic Reporting for period 2 - MacroEntrepreneurs (Entrepreneurs, Firms and the Macroeconomy)

Reporting period: 2020-06-01 to 2021-11-30

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.
The project has produced four finished scientific papers and one working paper draft close to being finalized. One of the finished scientific papers has already been published in a top, peer-reviewed, general interest journals, while the others are at various stages of the review process. The results have also been disseminated through various presentations at universities and policy institutions and major international 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 behaviour of existing economic models. Therefore, the research shows that differences at the firm-level are crucial for the behaviour 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 tax credits. Finally, preliminary results suggest that serial entrepreneurship – the ownership of multiple businesses at the same time or consecutively – is a key source of variation between firms. Businesses owned by serial entrepreneurs are more likely to survive and create jobs than those owned by “regular” businesses.
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, 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.