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The size distribution of firms in an economy with fixed and entry costs

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  • Erzo G.J. Luttmer

Abstract

This paper describes an analytically tractable model of balanced growth that allows for extensive heterogeneity in the technologies used by firms. Firms enter with fixed characteristics that determine their initial technologies and the levels of fixed costs required to stay in business. Each firm produces a different good, and firms are subject to productivity and demand shocks that are independent across firms and over time. Firms exit when revenues are too low relative to fixed costs. Conditional on fixed firm characteristics, the stationary distribution of firm size satisfies a power law for all sizes above the size at which new firms enter. The tail of the size distribution decays very slowly if the growth rate of the initial productivity of potential entrants is not too far above the growth rate of productivity inside incumbent firms. In one interpretation, this difference in growth rates can be related to learning-by-doing inside firms and spillovers of the information generated as a result. As documented in a companion paper, heterogeneity in fixed firm characteristics together with idiosyncratic firm productivity growth can generate entry, exit, and growth rates, conditional on age and size, in line with what is observed in the data.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 633.

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Date of creation: 2004
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Handle: RePEc:fip:fedmwp:633

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Keywords: Business cycles - Econometric models;

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References

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  1. Esteban Rossi-Hansberg & Mark L. J. Wright, 2006. "Urban structure and growth," Staff Report 381, Federal Reserve Bank of Minneapolis.
  2. Robert J. Gordon, 2000. "The Boskin Commission Report and its Aftermath," NBER Working Papers 7759, National Bureau of Economic Research, Inc.
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  15. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
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  17. Erzo G.J. Luttmer, 2004. "On the Age and Size Distribution of Business Firms," 2004 Meeting Papers 686, Society for Economic Dynamics.
  18. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "Pattenrs Of Firm Entry And Exit In U.S. Manufacturing Industries," Papers 1-88-2, Pennsylvania State - Department of Economics.
  19. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  20. Ricardo Lagos, 2006. "A model of TFP," Staff Report 345, Federal Reserve Bank of Minneapolis.
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  24. Xavier Gabaix, 2004. "Power laws and the origins of aggregate fluctuations," Econometric Society 2004 North American Summer Meetings 484, Econometric Society.
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Cited by:
  1. Luca David Opromolla & Alfonso Irarrazabal, 2005. "Hysteresis in Export Markets," International Trade 0512003, EconWPA.
  2. Richard E. Baldwin & Frédéric Robert-Nicoud, 2006. "Trade and Growth with Heterogeneous Firms," CEP Discussion Papers dp0727, Centre for Economic Performance, LSE.
  3. Esteban Rossi-Hansberg & Mark L. J. Wright, 2007. "Establishment Size Dynamics in the Aggregate Economy," American Economic Review, American Economic Association, vol. 97(5), pages 1639-1666, December.
  4. Mark L.J. Wright & Esteban Rossi-Hansberg, 2004. "Firm Size Dynamics in the Aggregate Economy," 2004 Meeting Papers 878, Society for Economic Dynamics.
  5. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2006. "Multi-Product Firms and Product Switching," NBER Working Papers 12293, National Bureau of Economic Research, Inc.
  6. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc.
  7. Xavier Gabaix, 2004. "Power laws and the origins of aggregate fluctuations," Econometric Society 2004 North American Summer Meetings 484, Econometric Society.
  8. Qi Li & Patrick Paul Walsh, 2009. "The Firm Size Distribution in a Small Open Economy: Theory and Evidence," Working Papers 200920, Geary Institute, University College Dublin.

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