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Firm Size Distribution under Horizontal and Vertical Innovation

  • Pedro Mazeda Gil
  • Fernanda Figueiredo
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    This paper studies the firm size distribution arising from an endogenous growth model of quality ladders with expanding variety. The probability distribution function of a given cohort of firms is a Poisson distribution that converges asymptotically to a normal of log size. However, due to firm entry propelled by horizontal R&D, the total distribution – i.e., when the entire population of firms is considered – is a mixture of overlapping Poisson distributions which is systematically right skewed and exhibits a fatter upper tail than the normal distribution of log size. Our theoretical results qualitatively match the empirical evidence found both for the cohort and the total distribution, and which has been presented as a challenge for theory to explain. Moreover, by obtaining a total distribution with a gradually falling variance over a long time span, the model is able to address complementary empirical evidence that points to a total distribution subtly evolving over time.

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    Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c016_065.

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    Length: 31 pages JEL Classification: O41, O38, L11
    Date of creation: Sep 2011
    Date of revision:
    Handle: RePEc:deg:conpap:c016_065
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    7. Gil, Pedro Mazeda & Brito, Paulo & Afonso, Oscar, 2013. "Growth And Firm Dynamics With Horizontal And Vertical R&D," Macroeconomic Dynamics, Cambridge University Press, vol. 17(07), pages 1438-1466, October.
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    9. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-83, June.
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    18. Kim P. Huynh & David T. Jacho‐Chávez, 2010. "Firm size distributions through the lens of functional principal components analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(7), pages 1211-1214, November/.
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