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New Goods and the Size Distribution of Firms

  • University of Minnesota
  • Erzo G.J. Luttmer

This paper describes a simple model of aggregate and firm growth based on the introduction of new goods. An incumbent firm can combine labor with blueprints for goods it already produces to develop new blueprints. Every worker in the economy is also a potential entrepreneur who can design a new blueprint from scratch and set up a new firm. The implied firm size distribution closely matches the fat tail observed in the data when the marginal entrepreneur is far out in the tail of the entrepreneurial skill distribution. The model produces a variance of firm growth that declines with size. But the decline is more rapid than suggested by the evidence. The model also predicts a new-firm entry rate equal to only 2.5% per annum, instead of the observed rate of 10% in U.S. data.

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File URL: https://www.economicdynamics.org/meetpapers/2007/paper_266.pdf
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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 266.

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Date of creation: 2007
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Handle: RePEc:red:sed007:266
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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  1. Satyajit Chatterjee & Esteban Rossi-Hansberg, 2007. "Spin-offs and the market for ideas," Working Papers 07-15, Federal Reserve Bank of Philadelphia.
  2. Tor Jakob Klette & Samuel Kortum, 2004. "Innovating Firms and Aggregate Innovation," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 986-1018, October.
  3. Andrew Atkeson & Ariel Tomás Burstein, 2010. "Innovation, Firm Dynamics, and International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(3), pages 433-484, 06.
  4. Erzo G.J. Luttmer, 2006. "Consumer search and firm growth," Working Papers 645, Federal Reserve Bank of Minneapolis.
  5. Dale T. Mortensen & Rasmus Lentz, 2005. "An Empirical Model of Growth Through Product Innovation," 2005 Meeting Papers 910, Society for Economic Dynamics.
  6. repec:att:wimass:9211 is not listed on IDEAS
  7. James A Schmitz & Thomas J Holmes, 1994. "On The Turnover of Business Firms and Business Managers," Working Papers 92-6, Center for Economic Studies, U.S. Census Bureau.
  8. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc.
  9. Stephen Hymer & Peter Pashigian, 1962. "Firm Size and Rate of Growth," Journal of Political Economy, University of Chicago Press, vol. 70, pages 556.
  10. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, 05.
  11. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  12. Burdett, Kenneth & Vishwanath, Tara, 1988. "Balanced Matching and Labor Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 1048-65, October.
  13. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  14. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
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