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New goods and the size distribution of firms

Listed author(s):
  • Erzo G. J. Luttmer

This paper describes a simple model of aggregate and firm growth based on the introduction of new goods. An incumbent firm can combine labor with blueprints for goods it already produces to develop new blueprints. Every worker in the economy is also a potential entrepreneur who can design a new blueprint from scratch and set up a new firm. The implied firm size distribution closely matches the fat tail observed in the data when the marginal entrepreneur is far out in the tail of the entrepreneurial skill distribution. The model produces a variance of firm growth that declines with size. But the decline is more rapid than suggested by the evidence. The model also predicts a new-firm entry rate equal to only 2.5% per annum, instead of the observed rate of 10% in U.S. data.

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File URL: http://www.minneapolisfed.org/research/WP/WP649.pdf
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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 649.

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Date of creation: 2007
Handle: RePEc:fip:fedmwp:649
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  1. Stephen Hymer & Peter Pashigian, 1962. "Firm Size and Rate of Growth," Journal of Political Economy, University of Chicago Press, vol. 70, pages 556-556.
  2. Klette, Tor Jakob & Kortum, Samuel, 2002. "Innovating Firms and Aggregate Innovation," Memorandum 02/2002, Oslo University, Department of Economics.
  3. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, 05.
  4. Esteban Rossi-Hansberg & Satyajit Chatterjee, 2007. "Spin-offs and the Market for Ideas," 2007 Meeting Papers 86, Society for Economic Dynamics.
  5. Rasmus Lentz & Dale T. Mortensen, 2005. "An Empirical Model of Growth Through Product Innovation," Boston University - Department of Economics - Working Papers Series WP2005-004, Boston University - Department of Economics.
  6. Andrew Atkeson & Ariel Burstein, 2007. "Innovation, firm dynamics, and international trade," NBER Working Papers 13326, National Bureau of Economic Research, Inc.
  7. Erzo G. J. Luttmer, 2006. "Consumer search and firm growth," Working Papers 645, Federal Reserve Bank of Minneapolis.
  8. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
  9. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
  10. Xavier Gabaix & Augustin Landier, 2008. "Why has CEO Pay Increased So Much?," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 49-100.
  11. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  12. James A Schmitz & Thomas J Holmes, 1994. "On The Turnover of Business Firms and Business Managers," Working Papers 92-6, Center for Economic Studies, U.S. Census Bureau.
  13. Burdett, Kenneth & Vishwanath, Tara, 1988. "Balanced Matching and Labor Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 1048-1065, October.
  14. Sutton, John, 2002. "The variance of firm growth rates: the ‘scaling’ puzzle," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 312(3), pages 577-590.
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