The original sin: Firms’ dynamics and the life-cycle consequences of economic conditions at birth

Abstract

This paper presents new evidence suggesting that the aggregate conditions faced by businesses in the year of birth affect their performance over the entire life cycle. Using a unique employer–employee dataset that covers the universe of Italian businesses over the period 1975–2017, we document that businesses born during recessions start on a larger scale and remain larger compared to businesses born during expansions. These effects persist when we account for: fixed effects at sectoral, provincial and time level; exit attrition; regional and sectoral economic conditions; firm common characteristics; firms’ quality; and business formation. We then exploit the reform of the dismissal procedure implemented in Italy in 1990 for gauging the impact of labour market regulation on business creation. We find that a tightening of employment protection widens the employment gap in favour of recessionary startups. The evidence in the paper supports a countercyclical mechanism of selection at entry.