SMU SOE Seminar (Oct 12, 2018): Firm Dynamics and Local Economic Shocks: Evidence from the Shale Oil and Gas Boom

Empirical evidence and models of firm dynamics ascribe an important job creation role to new businesses and a particular sensitivity of young firms to economic shocks. Studying the role of entrepreneurs and new businesses in the economy’s response to economic shocks is difficult due to the complicated causal connections between economic growth and firm entry. The recent revolution in shale oil and gas extraction—which created rapid, large gains in economic activity in areas possessing certain geological characteristics—presents a unique opportunity to study the response of firms—both new and existing—to an expansion of economic conditions. Using a diff-in-diff research design, we show that establishment entry accounts for most of the employment growth in shale regions. New firms and new establishments of existing firms account for about a quarter and three quarters of the increased annual aggregate growth rates, respectively, relative to plausible counterfactuals; cumulatively, establishments that opened after the shale boom began account for three quarters of total net employment gains from 2007 to 2014, and new firms comprise the majority of the cumulative growth from new establishments. These results have important implications for theories of firm dynamics.

JEL Codes: L26, M13, E24, R23, Q33, Q35