Exit Dynamics of Start-up Firms: Does Profit Matter?

Arbeitspapier

We estimate by means of indirect inference a structural economic model where firms' exit and investment decisions are the solution to a discrete-continuous dynamic programming problem. In the model the exit probability depends on the current capital stock and a measure of short-run profitability, where the latter is a state variable which is unobserved to the econometrician. We estimate the model on all start-up firms in the Norwegian manufacturing sector during 1994-2012, and find that both increased short-run profitability and a higher capital stock lowers the exit probability - this effect is statistically significant in all industries. We show that the difference in annual exit probability between firms that exited during the observation period and firms that did not exit is highly persistent over time, and there is no tendency for a sharp increase in the estimated exit probability just prior to exit. Hence, it is the cumulated effect of higher risk of exit over several years - compared with the average firm - that causes exits.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 5172

Classification and Topics

• Classification: Wirtschaft ; Multiple or Simultaneous Equation Models: Panel Data Models; Spatio-temporal Models ; Model Construction and Estimation ; Optimization Techniques; Programming Models; Dynamic Analysis ; Noncooperative Games ; Firm Behavior: Theory
• Subject: exit ; investments ; indirect inference ; continuous-discrete choice ; monopolistic competition ; costly reversibility

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Golombek, Rolf ; Raknerud, Arvid
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/107383
• Last update: 10.03.2025, 11:44 AM CET