Firm Learning, Innovation, and Growth
by Duernecker, Ignaszak, Jeun, and Kaas
Abstract: Using a large and representative panel survey of German firms, we document sizable forecast errors in employment growth which decline with firm age and which are related to investment and R&D activity. Motivated by this evidence, we build an endogenous growth model with heterogeneous firms that learn their productivity from noisy signals, decide about innovation activity, employment, and exit. Aggregate productivity growth responds to a selection channel via firm entry and exit and to an innovation channel via R&D investments of heterogeneous firms. We calibrate the model to replicate the realized and expected firm growth rates over the firms' lifecycle in our data. We use the calibrated model to quantify the role of information frictions in the selection and innovation channels behind aggregate productivity growth.