A Firm's First Year

Tinbergen Institute Discussion Paper No. TI 05-046/3

FRB Chicago Working Paper No. 2003-11

38 Pages Posted: 21 May 2005

See all articles by Jaap H. Abbring

Jaap H. Abbring

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER); Tinbergen Institute; IZA Institute of Labor Economics

Jeffrey R. Campbell

University of Notre Dame; Tilburg University

Date Written: May 2005

Abstract

This paper determines the structural shocks that shape a firm's first year by estimating a structural model of firm growth, learning, and survival using monthly sales histories from 305 Texas bars. We find that heterogeneity in firms' pre-entry scale decisions accounts for about 40% of their sales' variance; persistent post-entry shocks account for most of the remainder. We find no evidence of entrepreneurial learning. Variation of the firms' fixed costs consistent with an annual lease cycle explains their exit rates. We use the estimated model to price a new bar's option to exit, which accounts for 124% of its value.

Keywords: Firm exit, option value, fixed costs, Bayesian leaning

JEL Classification: C34, D83, L11, L83

Suggested Citation

Abbring, Jaap H. and Campbell, Jeffrey R., A Firm's First Year (May 2005). Tinbergen Institute Discussion Paper No. TI 05-046/3, FRB Chicago Working Paper No. 2003-11, Available at SSRN: https://ssrn.com/abstract=726744 or http://dx.doi.org/10.2139/ssrn.726744

Jaap H. Abbring (Contact Author)

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands

HOME PAGE: http://center.uvt.nl/staff/abbring/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://center.uvt.nl/staff/abbring/

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Jeffrey R. Campbell

University of Notre Dame ( email )

United States

Tilburg University ( email )

Tilburg, 5000 LE
Netherlands

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