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A Unified Theory of Firm Selection and Growth

  • Costas Arkolakis

This paper studies the effects of marketing choice to firm growth. I assume that firm-level growth is the result of idiosyncratic productivity improvements with continuous arrival of new potential producers. A firm enters a market if it is profitable to incur the marginal cost to reach the first consumer and pays an increasing marketing cost to reach additional consumers. The model is calibrated using data on the cross-section of firms and their sales across markets as well as the rate of incumbent firm-exit. The calibrated model quantitatively predicts firm exit, growth, and the resulting firm size distribution in the US manufacturing data. It also predicts a distribution of firm growth rates that deviates from Gibrat's law -i.e. independence of firm size and growth- in a manner consistent with the data.

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File URL: http://www.nber.org/papers/w17553.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17553.

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Date of creation: Oct 2011
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Publication status: published as Costas Arkolakis, 2016. "A Unified Theory of Firm Selection and Growth," The Quarterly Journal of Economics, vol 131(1), pages 89-155.
Handle: RePEc:nbr:nberwo:17553
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