Temporary versus Permanent Exits during the Covid 19 Pandemic

Abstract During the COVID-19 pandemic, firms were eight times more likely to exit temporarily than permanently. Temporary exits were 50% less likely to involve firing permanent workers, implying smaller welfare losses. However, the literature on firm exits has paid little attention to distinguishing between temporary and permanent exits. By leveraging the pandemic as an unforeseen shock in a panel involving 11000 firms across 39 countries, we find increased reliance on supplier-specific inputs raises the probability of temporary, but not permanent, exit by 45%. We argue labour supply drops temporarily in response to the pandemic, lowering profit margins and forcing exit. Temporary exits avoid losses from supplier-specific inputs, which permanent exits or continued operation necessarily incur, emerging as a dominant strategy for firms reliant on such inputs. Consistent with this argument, further analysis reveals input shortages - not demand drops - and occupations prone to infection in the absence of vaccines to be primary drivers. JEL Codes: D22, D23, L60, L16