Growing by learning: firm-level evidence on the size-productivity nexus

A well-known empirical regularity is that small firms are less productive than large firms. However, does size cause productivity or vice versa? Using firm-level administrative data for Spain, I find that productivity shocks are followed by significant increases in size defined by employment. In contrast, size shocks are not followed by productivity gains at the firm level. The combination of matching methods together with a bi-directional identification strategy allows me to account for selection on observables and endogeneity. I label this pattern as growing by learning because those firms learning about their higher efficiency levels are those that happen to grow more.