Claudia Vittori (University of Roma Tre)
Lilia Cavallari and Stefano D'Addona
Large and persistent differences in firm performance are well documented, even within narrowly defined industries. A growing body of work seeks to understand the origins of this heterogeneity and its implications for firm dynamics and the propagation of shocks. Yet, it remains unclear whether heterogeneity primarily reflects conditions at entry or is shaped by shocks over the firm life cycle. Disentangling the contribution of ex-ante characteristics from ex-post shocks is therefore essential for understanding firm dynamics and for designing effective policies. Our analysis relies on administrative microdata from the AIDA dataset, covering Italian limited liability firms over the period 20062021. We focus on two key performance indicatorsemployment and Return on Equity (ROE)and, building on a reduced-form framework inspired by Sterk et al. (2021), we exploit their age-dependent autocovariance structure to identify the relative importance of ex-ante and ex-post heterogeneity. We find that firms are highly heterogeneous at entry, with ex-ante factors accounting for about 95% of the cross-sectional variance in employment. However, this contribution declines rapidly over the life cycle, falling to roughly 40% by age 10 and converging to around 20% in the long run. This pattern indicates that, while initial conditions are crucial at entry, their influence weakens substantially over time, and post-entry shocks become the dominant driver of long-run dispersion. For profitability, the role of ex-ante heterogeneity is even more limited: it accounts for about 60% of dispersion at entry and quickly stabilizes at low levels, consistent with strong mean reversion and a prominent role for transitory shocks. Sectoral analyses reveal substantial heterogeneity in the persistence of initial conditions. In capital-intensive and technologically advanced sectors, ex-ante heterogeneity remains more persistent, whereas in low-tech and less regulated sectors it dissipates rapidly, with firm dynamics largely driven by post-entry shocks. Overall, our findings suggest that firm dynamics in Italy are less anchored in persistent initial conditions than in benchmark economies such as the United States, and are instead shaped to a greater extent by post-entry dynamics and idiosyncratic shocks. This has important implications for the transmission of shocks and for policies aimed at fostering firm growth.