Who Quits Next? Firm Growth in Growing Economies

This paper provides a theory linking characteristics of the industry dynamics to aggregate growth. We analyze firms' life cycle productivity, employment-age profiles, and firm selection across countries. Using a large cross-country dataset we document (i) more frequent labor productivity growth for firms operating in fast growing economies, (ii) lack of systematic relationship between the tail of the employment size distribution and growth and (iii) steeper employment-age profiles in slow growing economies. Our working thesis is that firms' likelihood of turning their investments into actual productivity growth, and uncertainty on their returns if successful, impacts firms investment in productivity, selection and aggregate growth. We think of firm uncertainty broadly, to include for example political instability, changes in tax regimes, lack of social capital or firm demand fluctuations. We argue that in slow growing rich productive economies, steep-employment age profiles are related to high return uncertainty and strong firm selection. We are able to accommodate poor and rich slow growing economies by decoupling firm's probability of success from return uncertainty. We build a tractable general equilibrium model that displays endogenous long run growth compatible with a stationary size distribution and the documented empirical facts. We contribute to the literature by analyzing how variations in the probability of firm success and return uncertainty account for differences in observed industry structure and its relationship with aggregate growth.