Demand or productivity: What determines firm growth?
|Title||Demand or productivity: What determines firm growth?|
|Publication Type||Working Paper|
|Year of Publication||2012|
|Authors||A. Pozzi, F. Schivardi|
|Keywords||demand heterogeneity, firm growth, misallocation, tfp|
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