Models of Firm Dynamics and the Hazard Rate of Exits: Reconciling Theory and Evidence Using Non-proportional Hazard Regression Models

We propose a new hazard regression model with age-varying covariate effects that incorporates many of the most prominent empirical regularities in studies of firm dynamics. The model admits negative effects of initial size that may either fall to zero with age (active learning model) or stay persistently negative (passive learning model), baseline hazard rates that decrease with age at higher durations, and adverse effects of macroeconomic shocks that affect only younger firms. We also allow for individual firm level unobserved heterogeneity. Our model estimates show evidence of active learning in quoted UK firms. Further, the effect of macroeconomic shocks decreases with age, and baseline hazard exhibits Increasing Mean Residual Life.