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The Firm Size Distribution across Countries and Skill-Biased Change in Entrepreneurial Technology

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  • Poschke, Markus

    ()
    (McGill University)

Abstract

How and why does the firm size distribution differ across countries? Using two datasets covering more than 30 countries, this paper documents that several features of the firm size distribution are strongly associated with income per capita: the entrepreneurship rate and the fraction of small firms fall with per capita income across countries, while average firm employment, the median and higher percentiles of the firm size distribution, and the dispersion and skewness of employment all rise with per capita income. The paper broadens existing evidence on the first three facts to cover more countries and newly introduces the last three to the literature. It then proposes a simple theory of skill-biased change in entrepreneurial technology motivated by recent microeconomic literature that fits with the evidence. For this, it introduces two additional features into an otherwise standard occupational choice, heterogeneous firm model a la Lucas (1978): technological change does not benefit all potential entrepreneurs equally, and there is a positive relationship between an individual's potential payoffs in working and in entrepreneurship. If some firms consistently benefit more from technological progress than others, they stay closer to the frontier, while others fall behind. Because wages rise for all workers, marginal entrepreneurs exit and become workers. Quantitatively, the model fits both the U.S. time series experience and cross-country patterns well.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7991.

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Length: 58 pages
Date of creation: Feb 2014
Date of revision:
Handle: RePEc:iza:izadps:dp7991

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Keywords: occupational choice; entrepreneurship; firm size; skill-biased technical change;

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Cited by:
  1. Felbermayr, Gabriel & Jung, Benjamin & Larch, Mario, 2013. "Optimal tariffs, retaliation, and the welfare loss from tariff wars in the Melitz model," Munich Reprints in Economics 20591, University of Munich, Department of Economics.
  2. Alain Gabler & Markus Poschke, 2013. "Experimentation by Firms, Distortions, and Aggregate Productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 26-38, January.
  3. Poschke, Markus, 2013. "Who becomes an entrepreneur? Labor market prospects and occupational choice," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 693-710.
  4. Vicente Salas-Fumás & J. Sanchez-Asin & David Storey, 2014. "Occupational choice, number of entrepreneurs and output: theory and empirical evidence with Spanish data," SERIEs, Spanish Economic Association, vol. 5(1), pages 1-24, March.
  5. Poschke, Markus, 2013. "The Decision to Become an Entrepreneur and the Firm Size Distribution: A Unifying Framework for Policy Analysis," IZA Discussion Papers 7757, Institute for the Study of Labor (IZA).
  6. Gomes, Pedro Maia & Kuehn, Zoë, 2014. "Human Capital and the Size Distribution of Firms," IZA Discussion Papers 8268, Institute for the Study of Labor (IZA).
  7. Larch, Mario & Norbäck, Pehr-Johan & Sirries, Steffen & Urban, Dieter, 2013. "Heterogeneous Firms, Globalization and the Distance Puzzle," Working Paper Series 957, Research Institute of Industrial Economics.
  8. Manuel García-Santana, 2013. "Foreign Firms, Distribution of Income, and the Welfare of Developing Countries," 2013 Meeting Papers 1044, Society for Economic Dynamics.

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