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Firm‐Specific Learning and the Investment Behavior of Large and Small Firms*
Author(s) -
Li Wenli,
Weinberg John
Publication year - 2003
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.t01-1-00082
Subject(s) - productivity , investment (military) , aggregate (composite) , monetary economics , production (economics) , distribution (mathematics) , economics , business , microeconomics , macroeconomics , mathematical analysis , materials science , mathematics , politics , political science , law , composite material
We examine a model of size distribution and growth of firms where firms learn about idiosyncratic productivity parameters through their production experience. Aggregate shocks, by adding noise to learning at the firm level, can produce different responses across firms. In particular, young firms, which are smaller on average than older firms and more uncertain about their productivity, can “overreact” to aggregate shocks. Such differences across firm sizes and ages, which arise here in a model with perfect financial markets, are often attributed to financial frictions that hit small and large firms differently.