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Establishment size dynamics in the aggregate economy

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Author Info
Esteban Rossi-Hansberg
Mark L. J. Wright

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Abstract

Why do growth and net exit rates of establishments decline with size? What determines the size distribution of establishments? This paper presents a theory of establishment dynamics that simultaneously rationalizes the basic facts on economy-wide establishment growth, net exit, and size distributions. The theory emphasizes the accumulation of industry-specific human capital in response to industry-specific productivity shocks. It predicts that establishment growth and net exit rates should decline faster with size and that the establishment size distribution should have thinner tails in sectors that use human capital less intensively or physical capital more intensively. In line with the theory, the data show substantial sectoral heterogeneity in U.S. establishment size dynamics and distributions, which is well explained by variation in physical capital intensity.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 382.

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Date of creation: 2006
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Handle: RePEc:fip:fedmsr:382

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Satyajit Chatterjee & Esteban Rossi-Hansberg, 2007. "Spin-offs and the Market for Ideas," NBER Working Papers 13198, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Eugenio Pinto, 2008. "Firm dynamics with infrequent adjustment and learning," Finance and Economics Discussion Series 2008-14, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. D'Erasmo, Pablo, 2006. "Investment and firm dynamics," MPRA Paper 3598, University Library of Munich, Germany, revised 12 Jul 2007. [Downloadable!]
  4. Bernard, Andrew & Redding, Stephen J & Schott, Peter, 2006. "Multi-Product Firms and Product Switching," CEPR Discussion Papers 5708, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Erzo G.J. Luttmer, 2007. "On the Mechanics of Firm Growth," Working Papers 2007-4, University of Minnesota, Department of Economics, revised 10 2007. [Downloadable!]
  6. Markus Poschke, 2007. "Employment Protection, Firm Selection, and Growth," IZA Discussion Papers 3164, Institute for the Study of Labor (IZA). [Downloadable!]
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  7. Hubert P. Janicki & Edward S. Prescott, 2006. "Changes in the size distribution of U.S. banks: 1960-2005," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 291-316. [Downloadable!]
  8. Erzo G.J. Luttmer, 2008. "On the mechanics of firm growth," Working Papers 657, Federal Reserve Bank of Minneapolis. [Downloadable!]
  9. John Stachurski, 2006. "Computing the Distributions of Economic Models Via Simulation," Working Papers 615, Kyoto University, Institute of Economic Research. [Downloadable!]
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  10. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2006. "Multi-Product Firms and Trade Liberalization," NBER Working Papers 12782, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Cristina Arellano & Yan Bai & Jing Zhang, 2007. "Contract enforcement and firms’ financing," Staff Report 392, Federal Reserve Bank of Minneapolis. [Downloadable!]
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