Business Conditions and Exit Risks Across Countries

The risk of market exit that business firms face is significant and differs widely across countries. This paper explores the links between countries’ business conditions and the exit risk at the country level. We set up a general equilibrium model which allows us to derive sharp predictions concerning how key factors which shape a country’s business and trade environment impact on the exit risk of firms which operate in these environments. The model is able to explain the negative correlation between countries’ average labor productivity and the perceived risks of exit borne out in the facts and its predictions accord with evidence on country differences in business conditions.