Assignment 5

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California State University, Fullerton *

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Economics

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Feb 20, 2024

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Economics 340 Assignment 5 Due October 20 th In this assignment, you’ll study business failures in California compared to the rest of the country using survival and hazard analysis tools. California is seen by business owners as a difficult place to do business. For example, Chief Executive magazine’s survey of Chief Executive Officers ranked California as the worst state to do business for 2019: https://chiefexecutive.net/2019-best-worst-states-for-business-an-overview/ . Past surveys have consistently ranked California as the worst place to do business. But do businesses fail faster in this perceived environment? On Canvas, there are two datasets from the Census’s Business Dynamics Statistics (https://www.census.gov/programs-surveys/bds.html), which is an annual survey of job, establishment, and firm creation and destruction. They will help us study the event of firms closing or “dying” as it is called in the data using survival and hazard analysis tools. We want to track the failure and survival rates of firms established in 2013. a. Please collect from California in the state data (state code “st” = 6) the number of firms (in “firms”) and number of firm deaths (in “firmdeath_firms”) for year 0 firms in 2013, year 1 firms in 2014, year 2 firms in 2015, year 3 firms in 2016, year 4 firms in 2017, and year 5 firms in 2018 and place them in a new spreadsheet. This will allow us to track businesses founded in 2013 through their 5 year of operation. This step (and part b) will likely be easier to do in Excel rather than R. Firm deaths are referring to the number of firms that closed between the previous and the current year of the survey (year 1: number of firms that closed in their first year of operation, year 2: number of firms that closed in their second year of operation, etc.). (12 points) Hint: the format of your table should look like this (you could have an age 0 row if you want as well, but it will not be used to calculate the hazards and survival functions in later parts; the age 0 firms in 2013 will be the risk set for age 1 firms): b. Please do the same steps as part (a) for the nationwide business data. (12 points) [1] Ag e Firms Failures Risk Set 1 2 3 4 5

c. Please compute the hazard function in each year for businesses in California. Use the number of firms listed from the previous period in the data as the risk set (for example, California’s risk set for firms closing in their first year would be the number of year 0 firms, the risk set for the 2 nd year would be the number of year 1 firms, etc.). (10 points) The rest of the homework may be easier to do in R, including this question. To load the data files into R, consider saving the spreadsheets from a and b as comma separated value files (using “Save As” in Excel) and then opening them using a script in R. d. Please compute the hazard function in each year for businesses nationwide. (10 points) [2]

e. Please plot the hazard functions for California and nationwide on the same graph. Do you think there’s any significant difference in the business failure rate between California and the nation as a whole? (12 points) There is a slight difference between the two lines but its not that significant. f. Please compute the survival function for each year for businesses in California. (10 points) g. Please compute the survival function for each year for businesses nationwide. Are your findings consistent with the findings about business survival rates of the Small Business Administration (see here: https://web.archive.org/web/20210212064343/https://www.sba.gov/sites/default/files/Business- Survival.pdf )? (12 points) [3] The black line represents California and the red line represents the United States as a whole.

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At year 5 of the graph, yes data is consistent with the Small Business Administration. At year 2, my findings were a couple of percentage points above the two-thirds rate of businesses surviving after two years of operation. h. Please plot the survival functions for California and nationwide on the same graph. Are California businesses more or less likely to survive 5 years? How different are the survival rates of businesses at that time according to your survival function estimates? (12 points) California is represented by the blue line while the nation as a whole is the yellow line, California is less likely to survive 5 years. The survival rates of businesses in the nation at the time are slightly ahead of those in California although they are only ahead by less than a percent. i. Please compute the difference in the number of firms year over year (year 1-year 0, year 2-year 1, etc.) for California and nationwide and compare them to the number of firm deaths in the data. Are they the same? Why might there be differences? (10 points) [4]

They are not the same this could be that the business has moved to a different state, or that some businesses have merged. Hint: the Census’s Business Dynamic Statistics glossary might help: https://www.census.gov/content/dam/Census/programs-surveys/business-dynamics-statistics/codebook- glossary.pdf [5]

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