Working Paper Number
WP #09013, July 2009 revised December 2009; Old working paper #13085
For the first 13 years after entry, the hazard rate for firm exits is persistently higher for urban than rural firms. While differences in observed industry market, local market and firm attributes explain some of the rural-urban gap in firm survival, rural firms retain a survival advantage 25% greater than observationally equivalent urban firms. In competitive markets, the remaining survival advantage for rural firms must be attributable to unobserved factors that are known at the time of entry. One plausible candidate for such a factor is thinner markets for the capital of failed rural firms. The implied lower salvage value of rural firms suggests that firms sorting into rural markets must have a higher probability of success in order to leave their expected profits equal to what they could earn in an urban market.
Published in American Journal of Agricultural Economics, Vol. 93 no. 3 (April 2011): 673-692.
Yu, Li; Orazem, Peter; and Jolly, Robert W., "Why do rural firms live longer?" (2009). Economics Working Papers (2002–2016). 87.