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Profitability, Productivity and Growth

Author

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  • Marek Ignaszak

    (Goethe University Frankfurt)

  • Petr Sedlacek

    (University of Oxford
    Centre for Economic Policy Research (CEPR))

Abstract

Recent empirical evidence suggests that firm selection and growth are largely demand-driven. We incorporate this feature into a model of endogenous growth in which heterogeneous firms innovate and survive based on profitability, rather than productivity alone. We show analytically that firm-level demand variation impacts aggregate growth by changing firms’ incentives to innovate. Estimating our model on U.S. Census firm data, we quantify that 20% of aggregate growth is demand-driven and that the macroeconomic impact of growth policies is fundamentally different compared to a model driven by productivity variation alone. We find empirical support for our model mechanism in firm-level data.

Suggested Citation

  • Marek Ignaszak & Petr Sedlacek, 2021. "Profitability, Productivity and Growth," Discussion Papers 2115, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2115
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    References listed on IDEAS

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    Cited by:

    1. Miller, Jason W. & Phares, Jonathan & Burks, Stephen V., 2023. "Job Creation and Job Destruction Dynamics in the U.S. Truck Transportation Industry, 1995-2019," IZA Discussion Papers 16184, Institute of Labor Economics (IZA).

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