SBE-UKRI: Business Cycles, Uncertain Growth and the Distribution of Production

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Young firms historically have had a large share in job creation, and the most successful among them have the highest growth rates of all firms and are a major source of productivity-enhancing innovation. Distributional shifts since 2007 featuring substantially fewer, smaller and slower-growing young firms thus may threaten lasting economic damage. Our proposed environment has the necessary heterogeneity to study the interplay between these changes, anemic investment and the aggregate productivity slowdown. We will ensure that our model reproduces post-war aggregate regularities while predicting a distribution of firms that meaningfully resembles the U.S. firm distribution and allowing a possibility of distributional changes like those among U.S. businesses since the last recession. Solving for stochastic dynamic general equilibrium in the presence of shocks to TFP growth and growth uncertainty in our setting with non-separable utility requires a generalization of numerical methods beyond existing heterogeneous firm studies. Our new method will be of general interest to researchers working in the area, expanding the realm of micro-to-macro research.