Business Failures, Macroeconomic Risk and the E¤ect of Recessions on Long-Run Growth: a Panel Cointegration Approach

This paper uses panel data on Italian regions to test two competing theories of long-run pro-ductivity dynamics: the opportunity-cost model, according to which productivity-enhancing activities have a comparative advantage during recessions; and the risk-aversion model, which predicts a negative relationship between transitory disturbances and productivity growth. Panel ECM estimates suggest that macroeconomic risk factors impinge on business failures on the same direction both in the short and in the long-run, and that the adjustment to the steady-state relationship is quite slow. Thus, our \u85ndings lend support to the risk-aversion theory of productivity growth and indicate that bankruptcy risks play a signi\u85cant role in the propagation of macroeconomic shocks