Discussion paper

DP16205 Productivity, Profitability and Growth

Recent empirical evidence suggests that firm selection and growth are largely demand-driven. We incorporate this feature into a model of endogenous growth in which heterogeneous firms innovate and survive based on profitability, rather than productivity alone. We show analytically that firm-level demand variation impacts aggregate growth by changing firms’ incentives to innovate. Estimating our model on U.S. Census firm data, we quantify that 20% of aggregate growth is demand-driven and that the macroeconomic impact of growth policies is fundamentally different compared to a model driven by productivity variation alone. We find empirical support for our model mechanism in firm-level data.


Sedláček, P and M Ignaszak (2021), ‘DP16205 Productivity, Profitability and Growth‘, CEPR Discussion Paper No. 16205. CEPR Press, Paris & London. https://cepr.org/publications/dp16205