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Firm Size Dynamics in the Aggregate Economy

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  • Wright, Mark

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.

Suggested Citation

  • Wright, Mark, 2004. "Firm Size Dynamics in the Aggregate Economy," Santa Cruz Department of Economics, Working Paper Series qt4rs4202s, Department of Economics, UC Santa Cruz.
  • Handle: RePEc:cdl:ucscec:qt4rs4202s
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    Cited by:

    1. Esteban Rossi-Hansberg & Mark L. J. Wright, 2007. "Urban Structure and Growth," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 597-624.
    2. Sherrill Shaffer & Iftekhar Hasan & Mingming Zhou, 2015. "New Small Firms and Dimensions of Economic Performance," Economic Development Quarterly, , vol. 29(1), pages 65-78, February.
    3. Piercarlo Zanchettin & Vincenzo Denicolò, 2009. "Leadership Cycles," Discussion Papers in Economics 09/25, Department of Economics, University of Leicester.
    4. Rasmus Lentz & Dale T. Mortensen, 2008. "An Empirical Model of Growth Through Product Innovation," Econometrica, Econometric Society, vol. 76(6), pages 1317-1373, November.
    5. Emin Dinlersoz & Glenn MacDonald, 2009. "The Industry Life-Cycle of the Size Distribution of Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 648-667, October.
    6. 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.
    7. 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.

    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • D2 - Microeconomics - - Production and Organizations
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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