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Firm Size Dynamics in the Aggregate Economy

  • Esteban Rossi-Hansberg
  • Mark L.J. Wright

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11261.

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Date of creation: Apr 2005
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Handle: RePEc:nbr:nberwo:11261
Note: EFG
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  8. Bronwyn H. Hall, 1986. "The Relationship Between Firm Size and Firm Growth in the U.S. Manufacturing Sector," NBER Working Papers 1965, National Bureau of Economic Research, Inc.
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  17. Thomas F. Cooley & Vincenzo Quadrini, 1999. "Financial Markets and Firm Dynamics," Working Papers 99-14, New York University, Leonard N. Stern School of Business, Department of Economics.
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  19. Orr, Dale, 1974. "The Determinants of Entry: A Sudy of the Canadian Manufacturing Industries," The Review of Economics and Statistics, MIT Press, vol. 56(1), pages 58-66, February.
  20. Charles I. Jones, 2004. "The Shape of Production Function and the Direction of Technical Change," NBER Working Papers 10457, National Bureau of Economic Research, Inc.
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  23. Iourii Manovskii & Gueorgui Kambourov, 2004. "Occupational Specificity of Human Capital," 2004 Meeting Papers 197, Society for Economic Dynamics.
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