Investment and Firm Dynamics

Abstract: Empirical papers have provided evidence on the negative relation of industry dynamics (growth, job reallocation and exit) on size (conditional on age) and on age (conditional on size).  In a stationary general equilibrium environment, this paper studies how capital adjustment costs influence firm dynamics.  The model is calibrated to match the investment distribution of U.S. firms and then tested to show that it accounts for the simultaneous size and age dependence. The size dependence (conditional on age) derives from standard conditions on optimal investment.  Smaller firms face a higher marginal rate of return and grow faster.  The age dependence (conditional on size) is driven by differences in the productivity composition of firms among age classes. On average, young firms are more productive and this results in higher growth and job reallocation rates for them.