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CESifo Working Paper Details

Exit Dynamics of Start-up Firms: Does Profit Matter?

Rolf Golombek (Website), Arvid Raknerud

CESifo Working Paper No. 5172 (January 2015)

Primary CESifo Category: [12] Empirical and Theoretical Methods

We estimate by means of indirect inference a structural economic model where firms’ exit and investment decisions are the solution to a discrete-continuous dynamic programming problem. In the model the exit probability depends on the current capital stock and a measure of short-run profitability, where the latter is a state variable which is unobserved to the econometrician. We estimate the model on all start-up firms in the Norwegian manufacturing sector during 1994-2012, and find that both increased short-run profitability and a higher capital stock lowers the exit probability - this effect is statistically significant in all industries. We show that the difference in annual exit probability between firms that exited during the observation period and firms that did not exit is highly persistent over time, and there is no tendency for a sharp increase in the estimated exit probability just prior to exit. Hence, it is the cumulated effect of higher risk of exit over several years - compared with the average firm - that causes exits.

Keywords: exit, investments, indirect inference, continuous-discrete choice, monopolistic competition, costly reversibility

JEL Classification:
[C330] Multiple or Simultaneous Equation Models: Models with Panel Data; Longitudinal Data; Spatial Time Series
[C510] Model Construction and Estimation
[C610] Optimization Techniques; Programming Models; Dynamic Analysis
[C720] Noncooperative Games
[D210] Firm Behavior: Theory

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