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Barriers to Reallocation and Economic Growth: The Effects of Firing Costs†

Barriers to Reallocation and Economic Growth: The Effects of Firing Costs† AbstractWe study how factors that hinder the reallocation of inputs across firms influence aggregate productivity growth. We extend Hopenhayn and Rogerson’s (1993) firm-dynamics model to allow for endogenous innovation. We evaluate the effects of firing taxes on reallocation, innovation, and productivity growth. We find firing taxes can have opposite effects on entrants’ innovation and incumbents’ innovation, and the overall outcome depends on the relative strengths of these forces. In the entrant-driven growth calibration, firing taxes reduce aggregate productivity growth, whereas aggregate productivity growth increases in the incumbent-driven growth calibration. (JEL D24, E23, E24, J23, J24, J62, K31, O31, O47) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Barriers to Reallocation and Economic Growth: The Effects of Firing Costs†

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References (46)

Publisher
American Economic Association
Copyright
Copyright © 2019 © American Economic Association
ISSN
1945-7715
DOI
10.1257/mac.20170170
Publisher site
See Article on Publisher Site

Abstract

AbstractWe study how factors that hinder the reallocation of inputs across firms influence aggregate productivity growth. We extend Hopenhayn and Rogerson’s (1993) firm-dynamics model to allow for endogenous innovation. We evaluate the effects of firing taxes on reallocation, innovation, and productivity growth. We find firing taxes can have opposite effects on entrants’ innovation and incumbents’ innovation, and the overall outcome depends on the relative strengths of these forces. In the entrant-driven growth calibration, firing taxes reduce aggregate productivity growth, whereas aggregate productivity growth increases in the incumbent-driven growth calibration. (JEL D24, E23, E24, J23, J24, J62, K31, O31, O47)

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Oct 1, 2019

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