Reallocation in the Great Recession: Cleansing or Not?

Abstract

The research program of the Center for Economic Studies (CES) produces a wide range of economic analyses to improve the statistical programs of the U.S. Census Bureau. Many of these analyses take the form of CES research papers. The papers have not undergone the review accorded Census Bureau publications and no endorsement should be inferred. Any opinions and conclusions expressed herein are those of the author(s) and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure that no confidential information is disclosed. Republication in whole or part must be cleared with the authors. To obtain information about the series, see www.census.gov/ces or contact Fariha Kamal, Editor,

Companies learning to innovate in recessions

“…During hard times, the challenge is likely amplified given demand uncertainty, revenue declines, and binding financial constraints. For these and other reasons, recessions may have a cleansing effect resulting in firm exit and reallocation of market shares from the least to the most productive companies (see, recently, Foster et al, 2014). Recessions may also have important effects on the direction of innovation.…”

Credit Frictions and The Cleansing Effect of Recessions

“…Our model accounts for the countercyclical exit rate in the overall economy shown in Figure 1 and derives its implication for average productivity in the presence of credit frictions. In an empirical contribution, Foster et al (2014) show that reallocation has been less productivity-enhancing during the Great Recession. Although they do not directly address why the Great Recession is different, they argue that the financial collapse could have played a relevant role.…”

The Measurement of Capital: Retrieving Initial Values from Panel Data

“…Many datasets contain book values of capital assets, which can be used to approximate the initial capital. A large number of empirical studies use this approach, including Olley and Pakes (1996) for the Longitudinal Research Database, Liu (1993), Pavcnik (2002), and Levinsohn and Petrin (2003) for Chilean data, and Foster et al (2016) for the Annual Survey of Manufactures data, among others. While many authors find the book value a reliable proxy, the main concern about this approach is that the book value does not necessarily capture the productive capital stock but, rather, reflects firms accounting practices for fiscal purposes, such as the accelerated depreciation of assets.…”

“…The common practice of approximating the initial capital stock in micro-level studies relies on proxy variables. In the case of physical capital, the most frequent approach is to initialize the PIM using the book value of fixed tangible assets (Olley and Pakes, 1996;Pavcnik, 2002;Levinsohn and Petrin, 2003;Foster et al, 2016); other authors propose to use a production-related variable, such as labor demand, intermediate materials, energy consumption, or purchased services, as the proxy variable for the initial capital stock (Martin, 2002;Gilhooly, 2009). While some proxies, such as the book value, are used more often than others, there is no empirical evidence to conclude that any one of them is superior to the others.…”