The success of a business depends in part on whether or not the manager and the business make a good "fit" or "match." Success also depends upon characteristics of the business that are distinct from the manager, for example, the convenience of the business location to customers. Variations across firms in "match quality" and in "business quality" account, in part, for why some businesses survive and others are discontinued. This paper is a first attempt at assessing the relative importance of variation in match quality and variation in business quality in accounting for the turnover dynamics of the U.S. small business sector. An evolutionary model is developed in which a selection process tends to eliminate both "unfit" business as well as "unfit" pairings between businesses and managers. We estimated this model with the Characteristics of Business Owners Survey. Our estimates suggest that variations in match quality play a more significant role than variations in business, or general, quality in accounting for turnover behavior of U.S. of small businesses. We discuss the implications of this finding and demonstrate its importance in the context of an experiment conducted in the estimated model economy.
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Managerial Tenure, Business Age And Small Business Dynamics
September 1992
Working Paper Number:
CES-92-11
This paper studies a Census Bureau survey of the small business sector that contains information on business age, business size and other proxies for business quality, information, typically available on business data sets, as well as proxies for the quality of the manager of each business, information that is not common to such data sets. One of the key proxies for managerial quality is the length of time the manager has been running the business, that is, managerial tenure. With proxies for both the underlying quality of each business and for the quality of the manager running the business, we are able to begin separating the influences of the manager from that of the underlying business on such factors as business discontinuance and business transfer. An example of the questions we explore is: Holding business quality fixed, what is the impact of the manager on the probability of business discontinuance? Regarding this question, we find that managers have a large impact on the course of their businesses, in particular, among businesses of the same age, managerial tenure has a significant impact on the probability of business discontinuance and transfer.
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Hires and Separations in Equilibrium
January 2016
Working Paper Number:
CES-16-57
Hiring occurs primarily to fill vacant slots that occur when workers separate. Equivalently, separation occurs to move workers to better alternatives. A model of efficient separations yields several specific predictions. Labor market churn is most likely when mean wages are low and the variance in wages is high. Additionally, over the business cycle, churn decreases during recessions, with hires falling at the beginning of recessions and separations declining later to match hiring. Furthermore, the young disproportionately bear the brunt of employment declines. More generally, hires and separations are positively correlated over time as well as across industry and firm. These predictions are borne out in the LEHD microdata at the economy and firm level.
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The Dynamics of Worker Reallocation Within and Across Industries
June 2005
Working Paper Number:
tp-2005-02
This paper uses an integrated employer-employee data set to answer two key questions:
1. What is the "equilibrium" amount of worker reallocation in the economy - both within and across industries?
2. How much does firm-level job reallocation affect the separation probabilities of workers?
Consistent with other work, we find that there is a great deal of reallocation in the economy,
although this varies substantially across demographic group. Much worker reallocation is
within the economy, roughly evenly split between within and across broadly defined
industries. An important new finding is that much of this reallocation is confined to a
relatively small subset of workers that is shuffled across jobs - both within and across
industries - in the economy. However, we also find that even for the most stable group of
workers, firm level job reallocation substantially increases the probability of transition for
even the most stable group of workers. Finally, workers who are employed in industries that
provide low returns to tenure are much more likely to reallocate both within and across
industries.
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The Winner's Curse of Human Capital
February 1999
Working Paper Number:
CES-99-05
We extend a model developed by Evans) to explain when start-ups are credit constrained. We show that the magnitude of the credit constraint is conditioned by the relative productivity of human capital in both wage work and self employment. Empirical analysis reveals that entrepreneurs with greater levels of human capital and entrepreneurial abilities have both greater financial wealth and greater levels of start-up capital pointing to the endogenous nature of credit constraints. Start-ups are generally financially constrained when measured by the impact on start-up capital of predicted household income. Greater levels of human capital relaxes financial constraints, apparently due to greater productivity of human capital in wage work than in self-employment. Paradoxically, then, those who are the least likely to be credit constrained in self-employment are those that are least likely to switch into self-employment, and vice versa.
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Entrepreneur Factor Inputs and Small Business Longevity
June 1989
Working Paper Number:
CES-89-04
This study analyzes nationwide samples of black and nonminority entrepreneurs who entered into small business ownership between 1976 and 1982. Econometric models are estimated that seek to differentiate traits of owners whose firms were still operating in late 1986 from those whose businesses had discontinued. Explanatory variables used to differentiate surviving firms from discontinuances include qualitative and quantitative measures of owner human capital, demographic traits, and owner financial capital inputs at the point of business startup. Certain characteristics typify the firms that are most likely to remain in business, irrespective of whether the owner is black or white: investment of substantial amounts of financial capital at the point of business startup; competing in the open marketplace, as opposed to catering to a minority clientele; high levels of owner educational attainment. The higher business discontinuance rates observed among blacks are rooted strongly in the lower financial capital inputs that typify the black firms at the point of startup.
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An Analysis of Small Business Size and Rate of Discontinuance
January 1990
Working Paper Number:
CES-90-02
This study investigates small business failure rates in relation to several measures of firm size. Utilizing the new Characteristics of Business Owners ( CBO ) data base, a nationwide sample of firms is utilized that is representative of the small business universe. One subset--small business employers--is shown to have relatively low rates of failure, while another group--very small firms with no employees--exhibits relatively high rates of business discontinuance. The finding that the probability of firm failure is strongly (inversely) related to firm size is shown to hold up as well when the age of the business is controlled for.
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High Growth Young Firms: Contribution to Job, Output and Productivity Growth
January 2016
Working Paper Number:
CES-16-49
Recent research shows that the job creating prowess of small firms in the U.S. is better attributed to startups and young firms that are small. But most startups and young firms either fail or don't create jobs. A small proportion of young firms grow rapidly and they account for the long lasting contribution of startups to job growth. High growth firms are not well understood in terms of either theory or evidence. Although the evidence of their role in job creation is mounting, little is known about their life cycle dynamics, or their contribution to other key outcomes such as real output growth and productivity. In this paper, we enhance the Longitudinal Business Database with gross output (real revenue) measures. We find that the patterns for high output growth firms largely mimic those for high employment growth firms. High growth output firms are disproportionately young and make disproportionate contributions to output and productivity growth. The share of activity accounted for by high growth output and employment firms varies substantially across industries ' in the post 2000 period the share of activity accounted for by high growth firms is significantly higher in the High Tech and Energy related industries. A firm in a small business intensive industry is less likely to be a high output growth firm but small business intensive industries don't have significantly smaller shares of either employment or output activity accounted for by high growth firms.
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Past Experience and Future Success: New Evidence on Owner Characteristics and Firm Performance
September 2010
Working Paper Number:
CES-10-24
Because the ability of entrepreneurs to start their own businesses is key to the success of the U.S. economy and to the economic mobility of many disadvantaged demographic groups, understanding why entrepreneurship activity varies across groups and geography is an increasingly important issue. As a step in this direction we employ a novel set of metrics of business success to the growing literature and find great variation across groups and metrics. For example, we find that black-owned firms grow slower than white or Asian-owned firms. However, once we condition on firm survival, the differences disappear. Interestingly, we also find differences across groups in their start-up histories. For example, Asian-owned firms are less likely than white-owned firms to have started-out as nonemployers but firms owned by all other minority groups, as well as women-owned firms, are more likely to start-out without employees.
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An Equilibrium Model of Sorting in an Urban Housing Market: A Study of the Causes and Consequences of Residential Segregation
January 2003
Working Paper Number:
CES-03-01
This paper presents a new equilibrium framework for analyzing economic and policy questions related to the sorting of households within a large metropolitan area. At its heart is a model describing the residential location choices of households that makes explicit the way that individual decisions aggregate to form a housing market equilibrium. The model incorporates choice-specific unobservables, and in the presence of these, a general strategy is provided for identifying household preferences over choice characteristics, including those that depend on household sorting such as neighborhood racial composition. We estimate the model using restricted access Census data that characterize the precise residential and employment locations of a quarter of a million households in the San Francisco Bay Area, yielding accurate measures of references for a wide variety of housing and neighborhood attributes across different types of household. The main economic analysis of the paper uses these estimates in combination with the equilibrium model to explore the causes and consequences of racial segregation in the housing market. Our results indicate that, given the preference structure of households in the Bay Area, the elimination of racial differences in income and wealth would significantly increase the residential segregation of each major racial group. Given the relatively small fractions of Asian, Black, and Hispanic households in the Bay Area (each ~10%), the elimination of racial differences in income/wealth (or, education or employment geography) spreads households in these racial groups much more evenly across the income distribution, allowing more racial sorting to occur at all points in the distribution ' e.g., leading to the formation of wealthy, segregated Black and Hispanic neighborhoods. The partial equilibrium predictions of the model, which do not account for the fact that neighborhood sociodemographic compositions and prices adjust as part of moving to a new equilibrium, lead to the opposite conclusion, emphasizing the value of the general equilibrium approach developed in the paper. Our analysis also provides evidence sorting on the basis of race itself (whether driven by preferences directly or discrimination) leads to large reductions in the consumption of public safety and school quality by all Black and Hispanic households, and large reductions in the housing consumption of upper-income Black and Hispanic households.
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The Slow Growth of New Plants: Learning about Demand?
March 2012
Working Paper Number:
CES-12-06
It is well known that new businesses are typically much smaller than their established industry competitors, and that this size gap closes slowly. We show that even in commodity-like product markets, these patterns do not reflect productivity gaps, but rather differences in demand-side fundamentals. We document and explore patterns in plants' idiosyncratic demand levels by estimating a dynamic model of plant expansion in the presence of a demand accumulation process (e.g., building a customer base). We find active accumulation driven by plants' past production decisions quantitatively dominates passive demand accumulation, and that within-firm spillovers affect demand levels but not growth.
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