The Firm Life Cycle and Macroeconomic Dynamics

Abstract

Since the 1980s, the US has experienced several puzzling aggregate trends. This dissertation traces back the origins of these macroeconomic dynamics to the firm life cycle. The first chapter focuses on the weak capital investment using confidential micro data from the US Census to show a striking divergence between micro and macro trends: investment increased by 10% for the average firm despite a 14.5% decline in aggregate investment. Changes in the firm age distribution masked this investment boom from aggregate data. The second chapter calibrates a heterogeneous firm dynamics model using the micro data. In the model, firm aging from falling entry explains 80% of the investment trend decline from 11.5% to 9% of GDP between 1980 and 2010: firm aging depressed aggregate investment because older firms invest less intensely despite plausibly being more profitable. Given historical changes in startup rates, the life cycle model rationalizes the boom and bust in aggregate investment and its puzzling relation with profits and interest rates since the 1950s. The third chapter explores the aggregate decline of the labor income share in US Census micro data, showing that unlike investment, the labor share fall cannot be explained by the changing quantity of startups and firm aging, which if anything may have dampened the trend. Instead, the decline in the labor share is likely related to the changing nature of young firms, whose origins remain to be explored in future work. Taken as a whole, this dissertation suggest that details about the firm life cycle--which can be measured in firm micro data--matter in different ways to understand various macroeconomic trends.