The scarring effect of recessions

According to the conventional view, recessions improve resource allocation by driving out less productive firms. This paper posits an additional scarring effect: recessions impede the developments of potentially superior firms by destroying them during their infancy. A model is developed to capture...

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Bibliographic Details
Published inJournal of monetary economics Vol. 56; no. 2; pp. 184 - 199
Main Author Ouyang, Min
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.03.2009
Elsevier
Elsevier Sequoia S.A
SeriesJournal of Monetary Economics
Subjects
Bankruptcy
Business cycles
Cleansing effect
Cleansing effect Scarring effect Creative destruction Learning Demand shocks
Creative destruction
Demand shock
Demand shocks
Economic activity
Economic models
Effects
Learning
Productivity
Recession
Recessions
Resource allocation
Scarring effect
Studies
L16
Learning
Demand shocks
E32
Cleansing effect
Creative destruction
C61
Scarring effect
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Summary:According to the conventional view, recessions improve resource allocation by driving out less productive firms. This paper posits an additional scarring effect: recessions impede the developments of potentially superior firms by destroying them during their infancy. A model is developed to capture both the cleansing and the scarring effects. A key ingredient of the model is that idiosyncratic productivity is not directly observable, but can be learned over time. When calibrated with statistics on entry, exit and productivity differentials, the model suggests that the scarring effect dominates the cleansing effect, and gives rise to lower average productivity during recessions.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2008.12.014