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Firm Size Distribution under Horizontal and Vertical R&D

Author

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  • Pedro Mazeda Gil

    () (CEF.UP, Faculdade de Economia, Universidade do Porto)

  • Fernanda Figueiredo

    () (CEAUL, Faculdade de Economia, Universidade do Porto)

Abstract

This paper studies the firm size distribution arising from an endogenous growth model of quality ladders with expanding variety. The probability distribution function of a given cohort of firms is a Poisson distribution that converges asymptotically to a normal of log size. However, due to firm entry propelled by horizontal R&D, the total distribution - i.e., when the entire population of firms is considered - is a mixture of Poisson distributions which is systematically right skewed and exhibits a fatter upper tail than the normal distribution of log size. Our theoretical results qualitatively match the empirical evidence found both for the cohort and the total distribution, and which has been presented as a challenge for theory to explain. Moreover, by obtaining a total distribution with a gradually falling variance over a long time span, the model is able to address complementary empirical evidence that points to a total distribution subtly evolving over time.

Suggested Citation

  • Pedro Mazeda Gil & Fernanda Figueiredo, 2010. "Firm Size Distribution under Horizontal and Vertical R&D," FEP Working Papers 389, Universidade do Porto, Faculdade de Economia do Porto.
  • Handle: RePEc:por:fepwps:389
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    File URL: http://www.fep.up.pt/investigacao/workingpapers/10.10.19_wp389.pdf
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    References listed on IDEAS

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    1. Gianni De Fraja & Alberto Iozzi, "undated". "Short Term and Long Term Effects of Price Cap Regulation," Discussion Papers 00/61, Department of Economics, University of York.
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    More about this item

    Keywords

    Firm size distribution; Skewness; Heavy tails; Endogenous growth; Horizontal and vertical R&D;

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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