Exit dynamics of start-up firms: Structural estimation using indirect inference

We estimate by means of indirect inference a structural economic model where firms’ exit and investment decisions are the solution to a discrete–continuous stochastic dynamic programming problem. Our method solves the main difficulty of simulation-based inference in structural discrete–continuous ch...

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Bibliographic Details
Published in:Journal of econometrics 2018-07, Vol.205 (1), p.204-225
Main Authors: Golombek, Rolf, Raknerud, Arvid
Format: Article
Language:English
Subjects:
Auxiliary model
Companies
Cost of capital adjustment
Decision making models
Discrete-continuous choice
Dynamic programming
Economic models
Expected values
Firm exit
Indirect inference
Inference
Investment
Manufacturing
Markovian decision model
Simulation
Startups
Stochastic models
Studies
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Summary:We estimate by means of indirect inference a structural economic model where firms’ exit and investment decisions are the solution to a discrete–continuous stochastic dynamic programming problem. Our method solves the main difficulty of simulation-based inference in structural discrete–continuous choice models, namely that the simulated trajectories are discontinuous functions of the structural parameters. Estimating the model on all start-up firms in the Norwegian manufacturing sector, we find that if the expected value of continuing production is persistently low relative to the expected value of exit, the firm has a high probability to exit.
ISSN:0304-4076
1872-6895
DOI:10.1016/j.jeconom.2018.03.011