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Models of firm heterogeneity and growth

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  • Erzo G. J. Luttmer

Abstract

Although employment at individual firms tends to be highly non-stationary, 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 paper 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.

Suggested Citation

  • Erzo G. J. Luttmer, 2010. "Models of firm heterogeneity and growth," Working Papers 678, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmwp:678
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    File URL: http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4419
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    File URL: http://www.minneapolisfed.org/research/WP/WP678.pdf
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    Cited by:

    1. Acemoglu, Daron & Cao, Dan, 2015. "Innovation by entrants and incumbents," Journal of Economic Theory, Elsevier, vol. 157(C), pages 255-294.
    2. Guiso, Luigi & Rustichini, Aldo, 2018. "Understanding the size and profitability of firms: The role of a biological factor," Research in Economics, Elsevier, vol. 72(1), pages 65-85.
    3. Jakub Growiec & Fabio Pammolli & Massimo Riccaboni, 2011. "Innovation and Corporate Dynamics: A Theoretical Framework," DISA Working Papers 2011/08, Department of Computer and Management Sciences, University of Trento, Italy, revised 29 Jul 2011.

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    Keywords

    Productivity;

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