Entry and exit in severe recessions: lessons from the 2008–2013 Portuguese economic crisis
- 481 Downloads
Under cleansing, productivity-enhancing reallocation is expected to be accelerated in recessions. In this paper we contribute to the analysis of one component of the national systems of entrepreneurship (namely capital market frictions) by showing that in the extreme scenario of deep recession efficiency in resource reallocation can actually be reduced. Using data from the pronounced Portuguese economic crisis, we do find a spike in firm exit in 2008–2012 vis-à-vis the 2004–2007 pre-crisis period, and a substantial increase in job destruction as well. But we did not find any strong evidence that job reallocation is countercyclical, while a non-negligible fraction of high-productivity firms actually shut down. In turn, our selected proxies for strictness in credit markets reveal that in deep recessions they are seemingly associated with increased firm exit and lower employment creation. Taken in round, our results show that credit market stringency in conjunction with an unfavourable economic cycle is likely to generate a long-lasting destructive process.
KeywordsEntry and exit Firm productivity Aggregate productivity growth Financial constraints Severe recessions
JEL ClassificationsD24 L11 L25 L26 L60
- Baily, M. N., Hulten, C. R., & Campbell, D. (1992). Productivity dynamics in manufacturing plants. Brookings Papers on Economic Activity, Microeconomics 1992, 187–249.Google Scholar
- Caballero, R., & Hammour, M. L. (1994). The cleansing effects of recessions. American Economic Review, 84(5), 1350–1368.Google Scholar
- Caves, R. (1998). Industrial organization and new findings on the turnover and mobility of firms. Journal of Economic Literature, 36(4), 1947–1982.Google Scholar
- Cox, D. R. (1972). Regression models and life-tables. Journal of the Royal Statistical Society: Series B (Methodological), 34(2), 187–220.Google Scholar
- Davis, S. J., Haltiwanger, J. C., & Schuh, S. (1996). Job creation and destruction. Cambridge, MA: MIT Press.Google Scholar
- Foster, L. J., Grim, C., & Haltiwanger, J. (2014). Reallocation in the great recession: Cleansing or not? NBER working paper no. 20427. doi: 10.3386/w20427.
- Schumpeter, J. A. (1934a). The theory of economic development: An inquiry into profits, capital, credit, interest and the business cycle. Second German edition: Schumpeter, J. A. (1926) (trans: Opie, R.). Cambridge: Harvard University Press.Google Scholar
- Schumpeter, J. A. (1934b). Depressions: Can we learn from past experience? In D. V. Brown, E. Chamberlin, S. E. Harris, et al. (Eds.), The economics of the recovery program (pp. 3–12). New York, NY: Whittlesey House.Google Scholar
- Yasar, M., Raciborski, R., & Poi, B. (2008). Production function estimation in Stata using the Olley and Pakes method. Stata Journal, 8(2), 221–231.Google Scholar