Firm profitability is affected by location-specific factors such as agglomeration economies, infrastructure, or proximity to consumers or key producers. Location-specific profits are also influenced by the idiosyncratic match between the entrepreneur and the community. Using data on the universe of all new firm entrants in North Carolina and Iowa between 1992–2011, this study shows how observed location-specific factors affect the probability of new firm entry. We then show that the unobserved factors that influence new firm entry increase the probability of firm survival, demonstrating that these unobserved idiosyncratic factors influence firm profitability and are not just unproductive entrepreneurial preferences for the location.These unobserved factors are interpretable as match capital between the entrepreneur and the location. Shift-share analysis demonstrates that the match capital varies systematically across urban locations, meaning that the match capital can be incorporated into property values in densely populated markets. However, the match capital varies disproportionately within and not between rural markets, meaning that match capital in thin markets is primarily due to a unique match between the entrepreneur and the rural location. These results suggest that it will be easier to transfer firm profitability in the case of a firm sale in dense urban markets than in thin rural markets.
L26, M13, R3
Artz, Georgeanne M.; Guo, Zizhen; and Orazem, Peter F., "Entrepreneurial Skills in Thick and Thin Markets" (2017). Economics Working Papers: 17025.