Every economy periodically experiences drastic declines, yet little research has examined factors that help retailers survive recessions. In this paper we use the "natural experiment" of the Great Depression of 1929 to 1939 to examine how retailing is affected during a catastrophic decline in economic activity. To direct the inquiry, we use theory from organizational ecology, which relates characteristics of firms within an industry to the ability to survive change in the business environment.

Existing theory suggests four variables for study: liability of newness, human capital, organizational form, and legitimacy. Survival is likely to be affected by the liability of newness. Individuals differ in their entrepreneurial abilities, and they come to know their ability through opening a business. As individuals learn about their ability, they either close the firm or expand output. The observed liability of newness occurs as individuals learn about their abilities over time, so younger firms and populations experience lower survival.

Human capital, the stock of skills embodied in people, can increase the ability of entrepreneurs and economic actors generally to survive change in the economic system (such as recession). Individuals with high human capital can more readily code and interpret information in order to perceive change, to interpret it correctly, and to reallocate resources appropriately.

Organizational form has been shown to be an important variable in previous studies. In retailing, chain stores are the significant innovation in organizational form of the early 20th century. Chains competed differently and therefore had several competitive advantages, including more buying power and lower costs, over their independent competitors. This greater efficiency is likely to enhance recession survival. But the Depression also gave rise to an intense challenge to the legitimacy of one organizational form within the retailing populations. Existing retail merchants explicitly challenged the legitimacy of chain stores during the Depression. The chain store organizational form is expected to be more legitimate and less vulnerable in older populations.

How to test these ideas? The determinants of retailer survival across 44 retailing populations (such as grocery stores and drug stores) are examined. The empirical strategy is to estimate a regression of retailer survival by population on the average age of a store in that population (measuring liability of newness), the average wage paid to an employee of the store in that population (measuring human capital), the ratio of chain stores to total stores (measuring organizational form), their interaction (measuring legitimacy), and appropriate controls. As theory suggested, survival was positively influenced by the average age of the population (liability of newness) and by the average wage paid in the population (human capital). Higher chain store penetration also positively influenced survival. The interaction of age and chain store penetration was also significant, suggesting that chains survived better in older populations when more time was available to develop legitimacy.

The study offers recommendations for retailing theory and practice. The most interesting result from both a theoretical and a managerial perspective is the significance of human capital. The temptation for retailers facing a recession is to engage in layoffs. But the results of this paper suggest that, when measured by recession survival, people are an asset and not a liability.