FIRMS AND FLEXIBILITY

Authors

  • BART HOBIJN,

    1. Hobijn: Economic Research Department, Federal Reserve Bank of San Francisco, San Francisco, CA 94105. Phone (415) 974-2314, Fax (415) 974-2168, E-mail bart.hobijn@sf.frb.org
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  • AYŞEGÜL ŞAHIN

    1. Şahin: Federal Reserve Bank of New York, Research and Statistics Group, New York, NY 10045. Phone (212) 720-5145, Fax (212) 720-1844, E-mail aysegul.sahin@ny.frb.org
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    • The views expressed in this article are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York, the Federal Reserve Bank of San Francisco, or the Federal Reserve System. We thank Nezih Guner and two anonymous referees for very helpful comments. We are grateful to Roc Armenter, Eric Bartelsman, Mark Bils, Yongsung Chang, Michael Elsby, Nezih Guner, Nobu Kiyotaki, Yoonsoo Lee, Lars Ljungqvist, Toshihiko Mukoyama, Marcelo Veracierto, and Jon Willis for their comments and suggestions.


Abstract

The United States and France have very similar labor productivity levels while there are considerable differences between the firm-size distributions and firm dynamics in the two countries. To reconcile these observations we introduce a joint model of endogenous entrepreneurship and firm-size dynamics with firing costs, unemployment benefits, entry costs, and a tax wedge between wages and labor costs. We use our model to analyze the role of these rigitidies in explaining firm dynamics and productivity patterns in the United States and France. We find that our model with all rigidities goes a long way in accounting for firm-size differentials between the United States and France while generating similar labor productivity outcomes. (JEL C78, D21, E24, J6)

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