Heterogeneous Firms, Growth and the Long Shadows of Business Cycles

• Authors: Cristiana Benedetti-Fasil, Giammario Impullitti, Omar Licandro, Petr Sedláček and Adam Hal Spencer
• BSE Working Paper: 1611 | November 2026
• Keywords: Business cycles, growth, selection, Heterogeneous Firms
• JEL codes: E32, O31, O40, L1

Do firms differ in their innovation response to business cycles? What economic forces shape this heterogeneity? And does it matter for aggregate propagation? We document substantial heterogeneity in firm-level R&D cyclicality, develop a theory to explain this fact, and validate its key mechanism in the data. In a tractable model of business cycles and innovation-driven growth, endogenous selection makes R&D particularly responsive to aggregate conditions for firms close to the exit margin. Consistent with this mechanism, firms closer to exit display more procyclical R&D in the data. Quantitatively, selection and endogenous growth interact powerfully: selection generates heterogeneous R&D cyclicality, while endogenous growth translates these heterogeneous responses into persistent aggregate effects. Ignoring heterogeneous R&D cyclicality misses roughly half of the long-run output cost of a severe recession.