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Firm Size Dynamics in the Aggregate Economy

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  • Esteban Rossi-Hansberg
  • Mark L.J. Wright

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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11261.

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Date of creation: Apr 2005
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Handle: RePEc:nbr:nberwo:11261

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Cited by:
  1. Dale T. Mortensen & Rasmus Lentz, 2005. "An Empirical Model of Growth Through Product Innovation," 2005 Meeting Papers 910, Society for Economic Dynamics.
  2. Glenn MacDonald & Emin Dinlersoz, 2005. "The Industry Life-Cycle of the Size Distribution of Firms," Working Papers 05-10, Center for Economic Studies, U.S. Census Bureau.
  3. Shaffer , Sherrill & Hasan , Iftekhar & Zhou, Mingming, 2009. "New small firms and dimensions of economic performance," Research Discussion Papers 4/2009, Bank of Finland.
  4. Esteban Rossi-Hansberg & Mark L.J. Wright, 2005. "Urban Structure and Growth," NBER Working Papers 11262, National Bureau of Economic Research, Inc.
  5. Erzo G.J. Luttmer, 2004. "The size distribution of firms in an economy with fixed and entry costs," Working Papers 633, Federal Reserve Bank of Minneapolis.
  6. 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 348, Bank of England.
  7. Vincenzo Denicolò & Piercarlo Zanchettin, 2010. "Leadership Cycles," Working Papers 2010.35, Fondazione Eni Enrico Mattei.

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