Article ID Journal Published Year Pages File Type
967142 Journal of Monetary Economics 2009 16 Pages PDF
Abstract
According to the conventional view, recessions improve resource allocation by driving out less productive firms. This paper posits an additional scarring effect: recessions impede the developments of potentially superior firms by destroying them during their infancy. A model is developed to capture both the cleansing and the scarring effects. A key ingredient of the model is that idiosyncratic productivity is not directly observable, but can be learned over time. When calibrated with statistics on entry, exit and productivity differentials, the model suggests that the scarring effect dominates the cleansing effect, and gives rise to lower average productivity during recessions.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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