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Slow convergence in economies with firm heterogeneity

Author

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  • Erzo G. J. Luttmer

Abstract

This paper presents a simple formula that relates the tail index of the firm size distribution to the aggregate speed with which an economy converges to its balanced growth path. The fact that there are so many firms in the right tail implies that aggregate shocks that permanently destroy employment among incumbent firms, rather than cause these firms to scale back temporarily, are followed by slow recoveries. This is true despite the existence of many rapidly growing firms.

Suggested Citation

  • Erzo G. J. Luttmer, 2012. "Slow convergence in economies with firm heterogeneity," Working Papers 696, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmwp:696
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    References listed on IDEAS

    as
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    7. Andrew Atkeson & Ariel Burstein, 2019. "Aggregate Implications of Innovation Policy," Journal of Political Economy, University of Chicago Press, vol. 127(6), pages 2625-2683.
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    Cited by:

    1. Xavier Gabaix & Jean‐Michel Lasry & Pierre‐Louis Lions & Benjamin Moll, 2016. "The Dynamics of Inequality," Econometrica, Econometric Society, vol. 84, pages 2071-2111, November.
    2. Stelios Giannoulakis, 2021. "Uncertainty, firm entry, and investment dynamics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 68(5), pages 623-642, November.
    3. François Gourio & Todd Messer & Michael Siemer, 2016. "Firm Entry and Macroeconomic Dynamics: A State-Level Analysis," American Economic Review, American Economic Association, vol. 106(5), pages 214-218, May.

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