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Models of Growth and Firm Heterogeneity

  • Erzo G.J. Luttmer


    (Department of Economics, University of Minnesota, Minneapolis, Minnesota 55455, and Federal Reserve Bank of Minneapolis)

Although employment at individual firms tends to be highly nonstationary, the employment size distribution of all firms in the United States appears to be stationary. It closely resembles a Pareto distribution. There is a lot of entry and exit, mostly of small firms. This review surveys general equilibrium models that can be used to interpret these facts and explores the role of innovation by new and incumbent firms in determining aggregate growth. The existence of a balanced growth path with a stationary employment size distribution depends crucially on assumptions made about the cost of entry. Some type of labor must be an essential input in setting up new firms.

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Article provided by Annual Reviews in its journal Annual Review of Economics.

Volume (Year): 2 (2010)
Issue (Month): 1 (09)
Pages: 547-576

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Handle: RePEc:anr:reveco:v:2:y:2010:p:547-576
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