Creative Destruction, Heterogeneous Firm Growth, and Efficient Resources Reallocation

In this paper, we propose a new measure of creative destruction and analyze its effect on the pattern of economic growth. Using the U.S. firm-level data from 1971 to 2000, we find that industries with higher firm-specific volatility of total factor productivity (TFP) growth grow faster. Further, these industries exhibit substantial performance difference between young and old firms and active resources reallocation between them. Our findings are consistent with Hobijn and Jovanovic (2001) and significant others who argue that younger firms have relative advantage in adopting new technology than older firms. Our results also suggest that models that allow firm heterogeneity may generate fruitful results in analyzing the evolution of an economy.