Product Switching and Young Firm Dynamics

Speaker:  Seula Kim,  University of Pennsylvania

Location: online or at Kiel Institute for the World Economy, Chausseestraße 111, 10115 Berlin

Organizers: Kiel Institute for the World Economy, CEPR

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Abstract: We study the life-cycle patterns of product-switching of multi-product firms and their aggregate implications. Using firm-product-level administrative data for the U.S. manufacturing sector, we estimate the match quality of firm-product pairs—a time-invariant, product-specific measure of firm performance—and show that young firms face greater challenges in identifying and retaining well-matched products. Young firms are more likely to keep poorly performing products while dropping better ones. Moreover, although young firms actively experiment by adding new products, often distant from their existing portfolio, many of these additions are misaligned with their expertise. These patterns suggest that young firms’ limited ability to find and retain the right products hampers their ability to climb the matchquality ladder and impedes performance improvements. To interpret these patterns, we develop a simple model of learning about product match quality over the firm life-cycle.