On The Turnover of Business Firms and Business Managers

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Abstract
The success of a business depends in part on whether or not the manager and the business make a good "fit" or "match." Success also depends upon characteristics of the business that are distinct from the manager, for example, the convenience of the business location to customers. Variations across firms in "match quality" and in "business quality" account, in part, for why some businesses survive and others are discontinued. This paper is a first attempt at assessing the relative importance of variation in match quality and variation in business quality in accounting for the turnover dynamics of the U.S. small business sector. An evolutionary model is developed in which a selection process tends to eliminate both "unfit" business as well as "unfit" pairings between businesses and managers. We estimated this model with the Characteristics of Business Owners Survey. Our estimates suggest that variations in match quality play a more significant role than variations in business, or general, quality in accounting for turnover behavior of U.S. of small businesses. We discuss the implications of this finding and demonstrate its importance in the context of an experiment conducted in the estimated model economy.

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