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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

Suggested Citation

  • Erzo G.J. Luttmer, 2004. "On the Age and Size Distribution of Business Firms," 2004 Meeting Papers 686, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:686

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    Cited by:

    1. Erzo G. J. Luttmer, 2004. "The size distribution of firms in an economy with fixed and entry costs," Working Papers 633, Federal Reserve Bank of Minneapolis.

    More about this item


    firm dynamics;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology


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