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Demand or productivity: what determines firm growth?
Author(s) -
Pozzi Andrea,
Schivardi Fabiano
Publication year - 2016
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12142
Subject(s) - total factor productivity , productivity , economics , shock (circulatory) , demand shock , differential (mechanical device) , econometrics , monetary economics , microeconomics , macroeconomics , engineering , medicine , aerospace engineering
We disentangle the contribution of unobserved heterogeneity in demand and productivity to firm growth using Italian data containing unique information on firm‐level prices. Demand and total factor productivity (TFP) shocks are equally important in shaping firm growth. However, the pass‐through of shocks to growth is highly incomplete, more so for productivity shocks. We argue that incompleteness and asymmetry of the pass‐through can be explained by frictions that, unlike those studied by the literature on factor misallocation, have differential effects according to the nature of the shock. We propose hurdles to firms' ability to reorganize as an example of these types of frictions.