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Firm Size Dynamics in the Aggregate Economy

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  • Wright, Mark

Abstract

Why do firm growth and exit rates decline with size? What determines the size distribution of firms? This paper presents a theory of firm dynamics that simultaneously rationalizes the basic facts on firm growth, exit, and size distributions. The theory emphasizes the accumulation of industry specific human capital in response to industry specific productivity shocks. The theory implies that firm growth and exit rates should decline faster with size, and the size distribution should have thinner tails, in sectors that use human capital less intensively, or correspondingly, physical capital more intensively. In line with the theory, we document substantial sectoral heterogeneity in US firm dynamics and firm size distributions, which is well explained by variation in physical capital intensities.

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Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt4rs4202s.

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Date of creation: 12 Dec 2004
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Handle: RePEc:cdl:ucscec:qt4rs4202s

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  6. Erzo G.J. Luttmer, 2004. "The size distribution of firms in an economy with fixed and entry costs," Working Papers, Federal Reserve Bank of Minneapolis 633, Federal Reserve Bank of Minneapolis.
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  15. Mark Wright & Esteban Rossi-Hansberg, 2004. "Urban Structure and Growth," 2004 Meeting Papers, Society for Economic Dynamics 33, Society for Economic Dynamics.
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  23. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 60(5), pages 1127-50, September.
  24. Orr, Dale, 1974. "The Determinants of Entry: A Sudy of the Canadian Manufacturing Industries," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 56(1), pages 58-66, February.
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Cited by:
  1. Sherrill Shaffer & Iftekhar Hasan & Mingming Zhou, 2008. "New Small Firms And Dimensions Of Economic Performance," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2008-24, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Vincenzo Denicolò & Piercarlo Zanchettin, 2010. "Leadership Cycles," Working Papers, Fondazione Eni Enrico Mattei 2010.35, Fondazione Eni Enrico Mattei.
  3. Erzo G.J. Luttmer, 2004. "The size distribution of firms in an economy with fixed and entry costs," Working Papers, Federal Reserve Bank of Minneapolis 633, Federal Reserve Bank of Minneapolis.
  4. Dale T. Mortensen & Rasmus Lentz, 2005. "An Empirical Model of Growth Through Product Innovation," 2005 Meeting Papers, Society for Economic Dynamics 910, Society for Economic Dynamics.
  5. Esteban Rossi-Hansberg & Mark L. J. Wright, 2006. "Urban structure and growth," Staff Report, Federal Reserve Bank of Minneapolis 381, Federal Reserve Bank of Minneapolis.
  6. Glenn MacDonald & Emin Dinlersoz, 2005. "The Industry Life-Cycle of the Size Distribution of Firms," Working Papers, Center for Economic Studies, U.S. Census Bureau 05-10, Center for Economic Studies, U.S. Census Bureau.
  7. Barnes, Sebastian & Price, Simon & Sebastia Barriel, Maria, 2008. "The elasticity of substitution: evidence from a UK firm-level data set," Bank of England working papers, Bank of England 348, Bank of England.

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