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A Unified Theory of Firm Selection and Growth

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  • Costas Arkolakis

Abstract

This article develops an analytical framework to study firm and exporter growth and provides a dynamic foundation for a standard general equilibrium trade model. Firm-level growth is the result of idiosyncratic productivity improvements with a continuous arrival of new potential producers. A firm enters a market if it is profitable to incur the marginal cost to reach the first consumer and pays an increasing marketing cost to reach additional consumers. I calibrate the model using data on the cross section of firm sales and bilateral trade, as well as the rate of incumbent firm exit. The calibrated model predicts that a firm’s growth is inversely related to its initial size, and that the distribution of growth rates of small firms is heavily skewed to the right. These predictions are confirmed by looking at the growth of sales of U.S. firms and Brazilian exporters to the United States. I use this model to study the impact of cross-firm reallocations on economic activity and measured productivity. JEL Codes: F12, L11, M31, D92.

Suggested Citation

  • Costas Arkolakis, 2016. "A Unified Theory of Firm Selection and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 131(1), pages 89-155.
  • Handle: RePEc:oup:qjecon:v:131:y:2016:i:1:p:89-155.
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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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