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On the Age and Size Distribution of Business Firms

  • Erzo G.J. Luttmer

This paper presents an analytically tractable model in which firm dynamics is driven by technology adoption and fixed costs. Existing firms experience idiosyncratic changes in technology. On average, the rate of technological progress among existing firms is slower than that of the frontier technology, and this leads to firms exiting eventually. The stationary distribution of firm size and age is characterized explicitly, allowing for several forms of firm heterogeneity. If firms only differ in terms of the variable factor productivity shocks they experience, then the size distribution has a right-tail that is Pareto. The tail index of this distribution depends on the difference between the average rate of technological progress among existing firms, and the rate at which the frontier technology improves over time. In one version of the model, this difference is related to the strength of technology spillovers. The model is calibrated to data from the US Census of Manufactures. With heterogeneity in fixed costs, the model can very closely match the observed joint age-size distribution, as well as the observed age and size contingent growth and exit rates

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 686.

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Date of creation: 2004
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Handle: RePEc:red:sed004:686
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