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Productivity, Profitability and Growth

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  • SedlÃ¡Ä ek, Petr
  • Ignaszak, Marek

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

  • SedlÃ¡Ä ek, Petr & Ignaszak, Marek, 2021. "Productivity, Profitability and Growth," CEPR Discussion Papers 16205, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16205
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    More about this item

    Keywords

    Demand; Firm heterogeneity; Growth; Innovation; R&d; Selection;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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