Firms and flexibility

The United States and France have very similar labor productivity levels while there are considerable differences between the firm-size distributions and firm dynamics in the two countries. To reconcile these observations we introduce a joint model of endogenous entrepreneurship and firm-size dynamics with firing costs, unemployment benefits, entry costs, and a tax wedge between wages and labor costs. We use our model to analyze the role of these rigitidies in explaining firm dynamics and productivity patterns in the United States and France. We find that our model with all rigidities goes a long way in accounting for firm-size differentials between the United States and France while generating similar labor productivity outcomes.